Ritel Proposal Skripsi Internasional 1

THE COLLECTION OF VALUE ADDED TAX ON ONLINE CROSSBORDER TRADE IN DIGITAL GOODS
by
Stephanus Phillipus van Zyl
submitted in accordance with the requirements

for the degree of
DOCTOR OF LAWS
at the
UNIVERSITY OF SOUTH AFRICA
SUPERVISOR:
Prof CJ Visser
April 2013
1
Student number:
49063340
I declare that THE COLLECTION OF VALUE ADDED TAX ON ONLINE CROSSBORDER TRADE IN DIGITAL GOODS is my own work and that all the sources I
have used or quoted have been indicated and acknowledged by means of complete
references.
__________________
SP van Zyl
16 April 2013
ii
ACKNOWLEDGEMENTS
To God be the glory for giving me the perseverance to complete this thesis with
enthusiasm throughout. I extend my gratitude to each and every person who has
contributed to this thesis in one way or the other. Without your support, comments,
ideas, and encouragement, this thesis would not have been possible. I specially
thank my mother for bringing food when I was too busy to eat. I thank Arnoldis, my
dog, for keeping me company in my study and sharing my frustration, laughter
(mostly hysterical), and the final joy of finishing the last chapter.
iii
ABSTRACT
Technological advances have had a major impact on traditional retail shopping

changing it from a physical undertaking to a completely digitised experience where
consumers buy digital media online. VAT systems that do not specifically provide for,
or which have not been adapted to cope with, technology-driven advances, generally
do not provide for the adequate levying and collection of VAT on cross-border digital
trade. The South African VAT system is no different. The taxation of e-commerce
should not artificially advantage or disadvantage e-commerce over comparable
traditional commerce, or unnecessarily hinder the development of e-commerce. This
thesis determines whether the South African VAT Act 89 of 1991 in its current form,
can be applied adequately to raise and collect VAT on cross-border digital
transactions. Where shortcomings in the VAT Act are identified, the harmonised VAT
rules of the European Union (EU), together with the Organisation for Economic
Cooperation and Development (OECD) proposals on consumption taxes, are
analysed and discussed to seek possible solutions and make recommendations.
KEYWORDS
anonymising technology; B2B transactions; B2C transactions; banker-customer

confidentiality; BIT-rate tax; blocked VAT account; consumption taxes; Cross-border
digital trade; destination principle; digital technology;electronically supplied services;
European Union; exempt supplies; fractionated VAT; General Sales Tax; goods and
services; intangible goods; multi-purpose voucher; OECD; origin principle; payment
method; place of consumption; place of supply; real-time VAT; reverse-charge
mechanism; self-assessment; single-purpose voucher; standard rated supplies;
tangible goods; taxable entity; taxable supplies; time of supply; use-and-enjoyment
principle; utilised and consumed; Value Added Tax; value of supply; VAT collection
model; vendor registration; voucher; webpage; website; withholding tax; zero-rated
supplies; representative taxpayer; tax free.
iv
TABLE OF CONTENTS
List of abbreviations .................................................................................................. xii
CHAPTER 1 INTRODUCTION ................................................................................... 1
1.1
Introduction....................................................................................................... 1
1.2
Purpose of the study......................................................................................... 3
1.3
Research question(s) ....................................................................................... 5
1.4
Methodology ..................................................................................................... 5
1.5
Limitations ........................................................................................................ 6
1.6
Organisation of the study.................................................................................. 6
1.7
Conceptualisation ........................................................................................... 11
1.8
Conclusion...................................................................................................... 14
CHAPTER 2 THE RISE OF E-COMMERCE ............................................................ 15

2.1 Introduction ........................................................................................................ 15
2.2 A brief history on the introduction of the Internet ................................................ 15
2.2.1 From ARPANET to INTERNET.................................................................... 15
2.2.2 E-mail and the World Wide Web .................................................................. 19
2.3 What is digital technology? ................................................................................. 21
2.3.1 MP4, MP3, AAC and Divx ............................................................................ 23
2.4 The impact of the Internet on society ................................................................. 25
2.4.1 Rapid growth in users .................................................................................. 26
2.4.2 Internet user profiles .................................................................................... 27
2.4.2.1 The start of e-commerce................................................................................................... 28
2.4.2.2 How does e-commerce work? .......................................................................................... 31
2.4.3 E-commerce in South Africa ........................................................................ 33

2.5 The future of e-commerce .................................................................................. 40
2.5.1 Materialised e-commerce ............................................................................ 41
2.5.2 Dematerialised e-commerce ........................................................................ 41
v
2.6 Impact of cross-border digital trade on VAT collection ....................................... 44

2.7 Conclusion ......................................................................................................... 48
CHAPTER 3 SOUTH AFRICA ................................................................................. 50
3.1 Introduction ........................................................................................................ 50
3.2 The history of VAT in South Africa ..................................................................... 51
3.3 The basic design of a VAT system ..................................................................... 53
3.3.1 VAT: A consumption tax .............................................................................. 53
3.3.2 VAT: An invoice-based tax .......................................................................... 55
3.3.3 VAT: A broad-based tax .............................................................................. 55
3.3.4 Destination v origin-based tax...................................................................... 56
3.4 The rise of e-commerce and the South African VAT system .............................. 58
3.4.1 Is there a supply of goods or services? ....................................................... 59
3.4.1.1 Payment for the use of, or the right to use, intellectual property ................................... 62
3.4.1.2 Electronic products equal to services? ............................................................................. 64
3.4.2 Where is the supply made? ......................................................................... 68

3.4.2.1 Place of supply: Exported goods ....................................................................................... 69
3.4.2.2 Place of supply: Exported services .................................................................................... 70
3.4.2.3 Place of supply: Imported goods ...................................................................................... 73
3.4.2.4 Place of supply: Imported services ................................................................................... 74
3.4.3 When is the supply made? .......................................................................... 86

3.4.3.1 Time of supply: Imported goods ....................................................................................... 86
3.4.3.2 Time of supply: Imported services .................................................................................... 88
3.4.3.3 Time of supply: Vouchers.................................................................................................. 90
3.4.4 What is the value of the supply? .................................................................. 91

3.4.4.1 Imported goods................................................................................................................. 92
3.4.4.2 Imported services.............................................................................................................. 94
3.4.5 Was the supply made by a taxable entity? .................................................. 99

3.4.5.1 Registration: Requirements ............................................................................................ 100
3.4.5.2 Duty to register? ............................................................................................................. 104
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3.4.5.3 The non-resident non-vendor importer as taxable entity .............................................. 109
3.4.6 In the course or furtherance of an enterprise ............................................. 110

3.4.7 Is the transaction taxable? ......................................................................... 113
3.4.8 Collection mechanisms .............................................................................. 114
3.4.8.1 B2C transactions: Supplies by foreign registered VAT vendors ...................................... 116
3.4.8.2 B2C transactions: Supplies by foreign non-vendors ....................................................... 121
3.4.8.3 B2B transactions: Supplies by a foreign registered vendor ............................................ 124
3.4.8.4 B2B transactions: Supplies by foreign non-vendor ......................................................... 125
3.5 Conclusion ....................................................................................................... 126

CHAPTER 4 THE EUROPEAN UNION ................................................................. 128
4.1 Introduction ...................................................................................................... 128
4.2 The history of VAT in Europe ........................................................................... 130
4.3 The VAT treatment of e-commerce in the EU .................................................. 134
4.3.1 Is there a supply of goods or services? ..................................................... 134
4.3.2 Where is the supply made? ....................................................................... 144
4.3.2.1 Place of supply under the Sixth Directive ....................................................................... 146
4.3.2.2 Place of supply under Council Directive 2002/38/EC ..................................................... 150
4.3.3 When is the supply made? ........................................................................ 173

4.3.3.1 Payment methods ........................................................................................................... 175
4.3.3.2 Single-purpose vouchers (SPV) ....................................................................................... 177
4.3.3.3 Multi-purpose vouchers (MPV)....................................................................................... 179
4.3.4 What is the value of the supply .................................................................. 181

4.3.4.1 Imported goods............................................................................................................... 182
4.3.4.2 Vouchers ......................................................................................................................... 183
4.3.4.3 Discount vouchers........................................................................................................... 185
4.3.4.4 No consideration paid ..................................................................................................... 187
4.3.4.5 Currency issues ............................................................................................................... 189
4.3.5 Is the supply made by a taxable entity? ..................................................... 190

4.3.5.1 B2B transactions between EU vendors ........................................................................... 190
4.3.5.2 B2B transactions between a foreign supplier and an EU vendor ................................... 191
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4.3.5.3 B2C transactions between an EU vendor and EU non-vendor ....................................... 192

4.3.5.4 B2C transactions between a foreign supplier and an EU non-vendor ............................ 195
4.3.6 Is the supply made in the course and furtherance of an enterprise? ......... 199
4.3.7 Is the transaction taxable? ......................................................................... 201
4.3.8.1 Collection mechanism: EU supplier ................................................................................ 206
4.3.8.2 Collection mechanism: EU supplier in terms of the reverse-charge mechanism ........... 215
4.3.8.3 Collection mechanism: Foreign supplier ......................................................................... 216
4.4 Conclusion ....................................................................................................... 228

CHAPTER 5 THE OECD........................................................................................ 231
5.1 Introduction ...................................................................................................... 231
5.2 The history of the OECD .................................................................................. 232
5.3 The OECD proposals on consumption taxes on cross-border e-commerce..... 233
5.3.1 Is there a supply of goods or services? ..................................................... 235
5.3.1.1 Electronic processing of tangible products ..................................................................... 235
5.3.1.2 Electronic ordering and downloading of digital products .............................................. 236
5.3.1.3 Electronic ordering and downloading of digital products for purposes of commercial
exploitation of copyright............................................................................................................. 237
5.3.1.4 Updates and add-ons ...................................................................................................... 237
5.3.1.5 Limited duration software and digital information licenses ........................................... 238
5.3.1.6 Single-use software ......................................................................................................... 238
5.3.1.7 Application hosting-separate licence .............................................................................. 239
5.3.1.8 Application hosting-bundled contract ............................................................................ 239
5.3.1.9 Application service provider ........................................................................................... 240
5.3.1.10 Website hosting ............................................................................................................ 241
5.3.1.11 Software maintenance .................................................................................................. 242
5.3.1.12 Data warehousing ......................................................................................................... 242
5.3.1.13 Customer support over a computer network ............................................................... 243
5.3.1.14 Data retrieval ................................................................................................................ 244
5.3.1.15 The delivery of exclusive or high value data ................................................................. 244
5.3.1.16 Advertising .................................................................................................................... 245
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5.3.1.17 Electronic access to professional advice ....................................................................... 245

5.3.1.18 Technical information ................................................................................................... 246
5.3.1.19 Information delivery ..................................................................................................... 246
5.3.1.20 Access to an interactive website................................................................................... 246
5.3.1.21 Online shopping portal ................................................................................................. 247
5.3.1.22 Online auctions ............................................................................................................. 247
5.3.1.23 Sales referral programs ................................................................................................. 248
5.3.1.24 Content acquisition transactions .................................................................................. 248
5.3.1.25 Streamed (real-time) web-based broadcasting ............................................................ 249
5.3.1.26 Carriage fees ................................................................................................................. 250
5.3.1.27 Website subscription allowing the download of digital products ................................ 250
5.3.1.28 Discussion and criticism ................................................................................................ 251
5.3.2 Where is the supply made? ....................................................................... 254

5.3.2.1 B2B transactions ............................................................................................................. 255
5.3.2.2 B2C transactions ............................................................................................................. 264
5.3.3 When is the supply made? ........................................................................ 273

5.3.4 What is the value of the supply? ................................................................ 274
5.3.5 Is it made by a taxable entity? ................................................................... 274
5.3.5.1 B2B transactions ............................................................................................................. 275
5.3.5.2 B2C transactions ............................................................................................................. 277
5.3.6 Is the supply made in the course or furtherance of an enterprise? ............ 278
5.3.7 Is the supply taxable? ................................................................................ 279
5.3.8.1 Registration ..................................................................................................................... 281
5.3.8.2 The reverse-charge mechanism ...................................................................................... 291
5.3.8.3 Tax collection at source and remittance ......................................................................... 295
5.3.8.4 Collection agent .............................................................................................................. 297
5.3.8.5 Bit tax .............................................................................................................................. 299
5.4 Conclusion ....................................................................................................... 300

CHAPTER 6 VAT COLLECTION BY BANKS ........................................................ 304
6.1 Introduction ...................................................................................................... 304
ix
6.2 VAT collection by financial institutions: How does it work? ............................. 305
6.2.1 Blocked VAT Account system .................................................................... 307
6.2.2 Real-time VAT ........................................................................................... 308
6.3 Benefits of VAT collection by financial institutions ............................................ 309
6.3.1 Identification and location of customer....................................................... 309
6.3.2 Destination and origin principle .................................................................. 312
6.3.3 Simplified VAT collection ........................................................................... 314
6.3.4 No delays in VAT remittance ..................................................................... 315
6.3.5 VAT fraud and unintended under-taxation eliminated ................................ 315
6.3.6 Can be applied to tangible and intangible transactions.............................. 318
6.4 Objections and concerns .................................................................................. 319
6.4.1 No data to process transaction .................................................................. 319
6.4.1.1 Value of the supply ......................................................................................................... 320
6.4.1.2 Type of supply ................................................................................................................. 320
6.4.1.3 Recipients VAT status ..................................................................................................... 323
6.4.2 Sophisticated software / change in systems required ................................ 324

6.4.3 Additional costs involved ........................................................................... 325
6.4.4 Debt collection risk ..................................................................................... 328
6.4.5 Privacy ....................................................................................................... 330
6.4.5.1 Banker-customer confidentiality .................................................................................... 330
6.4.5.2 Invasion of privacy by the financial institution ............................................................... 338
6.4.6 Multiple payment systems ......................................................................... 340

6.4.7 Greater international cooperation required ................................................ 342
6.5 Conclusion ....................................................................................................... 343
CHAPTER 7 RECOMMENDATIONS AND CONCLUSION.................................... 345
7.1 Introduction ...................................................................................................... 345
7.2 Is there a supply of goods or services? ............................................................ 346
x
7.3 Where is the supply made? .............................................................................. 348

7.4 When is the supply made? ............................................................................... 351
7.4 What is the value of the supply?....................................................................... 353
7.5 Was the supply made by a taxable entity? ....................................................... 354
7.6 Is the supply made in the course and furtherance of an enterprise? ................ 355
7.7 Is the supply taxable?....................................................................................... 356
7.8 How is VAT on the transaction collected? ........................................................ 356
7.8.1 Reverse-charge mechanism ...................................................................... 356
7.8.2 Registration................................................................................................ 357
7.8.3 OECD proposals ........................................................................................ 358
7.8.4 Collection by financial institutions .............................................................. 358
7.9 Conclusion ....................................................................................................... 360
BIBLIOGRAPHY
361
xi
List of abbreviations
ARPA
Advanced Research Projects Agency
B2B
Business-to-Business transaction
B2C
Business-to-Consumer transaction
CERN
European Laboratory of Particle Physics
CFA
Committee on Fiscal Affairs
CTPA
Centre for Tax Policy and Administration
CPU
Central Processing Unit
ECJ
European Court of Justice
EEC
European Economic Community
EFT
Electronic Funds Transfer
EU
European Union
GATT
General Agreement on Tariffs and Trade
GDP
Gross Domestic Product
GST
Goods and Services Tax (General Sales Tax in the South African
context)
IP
Internet Protocol
MPV
Multi-purpose voucher
NSFNET
National Science Foundation
OECD
Organisation for Economic Cooperation and Development

xii
OEEC
Organisation for European Economic Cooperation
RAM
Random Access Memory
SACU
South African Customs Union
SARS
South African Revenue Service
SCA
Supreme Court of Appeal
TCP
Transmission Control Protocol
WTO
World Trade Organisation
SPV
Single-purpose voucher
TAG
Technical Advisory Group
URL
Uniform Resource Locator
USA
United States of America
USSR
Union of Soviet Socialist Republics
VAT
Value Added Tax
XML
Extensible Markup Language
xiii
xiv
CHAPTER 1:
INTRODUCTION
1.1
Introduction
Ever since the early commercial exploitation of inter-connected digital computers in

the early 1980s, it has been clear that man would enter an era of the connected
world 1 However, it was not until 24 October 1995 that the Internet was formally
defined as
the global information system that -- (i) is logically linked together by a globally
unique address space based on the Internet Protocol (IP) or its subsequent
extensions/follow-ons; (ii) is able to support communications using the Transmission
Control Protocol/Internet Protocol (TCP/IP) suite or its subsequent extensions/followons, and/or other IP-compatible protocols; and (iii) provides, uses or makes
accessible, either publicly or privately, high level services layered on the
communications and related infrastructure described herein.
Since its inception, the Internet has continued to expand in use, size, reach, and
impact. This has reached the point where we can no longer imagine an existence
without the Internet. 3 It is estimated that the worlds Internet population will increase
to three billion users by 2016. 4 This growing phenomenon is not restricted to
developed countries. Developing G-20 countries already have 800 million Internet
Leiner BM, Cerf VG, Clark DD, Kahn RE, Kleinrock L, Lynch DC, Postel J, Roberts LG, Wolf S A Brief History of
the Internet http://www.internetsociety.org/internet/internet-51/history-internet/brief-history-internet
[accessed on 14 March 2013].
2
Leiner BM, Cerf VG, Clark DD, Kahn RE, Kleinrock L, Lynch DC, Postel J, Roberts LG, Wolf S A Brief History of
the Internet http://www.internetsociety.org/internet/internet-51/history-internet/brief-history-internet
3
Dean D, DiGrande S, Field D, Lundmark A, ODay J, Pineda J, Zwillenberg P (2012) The Internet Economy in the
G-20 [accessed on 14 March 2013].
4
G-20
https://www.bcgperspectives.com/content/articles/media_entertainment_strategic_planning_4_2_trillion_op
portunity_internet_economy_g20/ [accessed on 14 March 2013].
users 80% of whom use the Internet to access social networks. 5 The introduction of
mobile devices such as smart phones, tablets, and notebooks will dramatically
influence the expansion of the Internet in developing countries. 6 Retailers, service
providers, and governments cannot afford to ignore the rapid impact the use of
Internet applications has on society.
The South African retail industry has seen a vigorous upturn in online sales and
online business since the commercial exploitation of the Internet was introduced. 7
From 2000 to 2009, South Africas Internet population grew from 5,5% to 10,8% of
the total population. 8 In 2011, online shopping accounted for 1,9% of the South
African economy. 9 Online shopping is expected to account for at least 2,5% of South
Africas total economy by 2016. 10 With conventional retailers investing in online
shopping, it is anticipated that an increasing number of Internet users is likely to use
the Internet for online shopping, banking, and e-billing.
Technological advances have had a major impact on traditional retail shopping
changing it from a physical undertaking to a completely digitised experience where
consumers buy digital media online. In a society where digital media is readily
available, it is trite that consumer behaviour will ultimately adapt to a digitised world.
Digital files are entirely intangible, and the transfer of these files from one device to
another can be effected through the Internet or Bluetooth technology. No physical
presence or physical form of delivery is required.
5
G-20
6
G-20
7
Goldstuck A and Ambrose S (2007) Big Upturn for Online Retail http://www.worldwideworx.com/?p=58
[accessed on 11 October 2010].
8
Internet World Stats (2012) South Africa Internet Usage and Marketing Report
http://www.internetworldstats.com/af/za.htm [accessed on 23 May 2012].
9
Mawson N (2012) SAs Internet Economy to Double
http://www.itweb.co.za/index.php?option=com_content&view=article&id=52797:sas-internet-economy-todouble&catid=69 [accessed on 23 May 2012].
10
Mawson N (2012) SAs Internet Economy to Double
http://www.itweb.co.za/index.php?option=com_content&view=article&id=52797:sas-internet-economy-todouble&catid=69 [accessed on 23 May 2012].
Value Added Tax (VAT) systems were designed in an era pre-dating digital
technology and the Internet. In addition, VAT systems operate based on tax policy,
tax administration and the law. If any of these are inadequate, difficult technical
issues will not be manageable. As a result, VAT systems that do not specifically
provide for, or which have not been adapted to cope with, technology-driven
advances, generally do not provide for the adequate levying and collection of VAT
on cross-border digital trade. The South African VAT system is no exception.
This study will determine whether the VAT Act 11 in its current form can be applied
adequately to raise and collect VAT on cross-border digital transactions. Where
shortcomings in the VAT Act 12 are identified, the harmonised VAT rules of the
European Union (EU), together with the Organisation for Economic Cooperation and
Development (OECD) proposals on consumption taxes, will be analysed and
discussed to seek possible solutions and make recommendations.
The principal deficiency in modern VAT systems is their inability to levy VAT on
affected transactions through a simplified collection mechanism that does not
overburden taxable entities charged with VAT collection, or is not inefficient from an
economic point of view. The inadequacies of the reverse-charge and registration
mechanisms will be discussed with a view to proposing a modern technology-driven
VAT collection mechanism to be applied by financial institutions.
1.2
Purpose of the study
The Internet is one of the fastest growing media in the world and has integrated
many of the worlds early inventions like radio, television, and the telephone. 13 It has
had so major an impact on society that many people are completely dependent on it.
The rapid expansion of the Internet has led us to the point at which we now need to
deal with its consequences. Three major factors have hampered - and will continue
to hamper - our ability to gain more information on the Internet, and to address the
problems created by use of the Internet.
11
Act 89 of 1991.
Act 89 of 1991.
13
Slevin J (2000) The Internet and Society at 1.
12
The first factor is new media or new technology. 14 This factor is born out of the fear
of new technology, or a lack of understanding of complicated technological
advances. This fear can be easily overcome if the phenomenon of new technology is
treated like any other problem: in other words, by applying existing theories and
knowledge before rushing to create new theories, regulations, or laws. 15
The second factor is that, despite the fact that the Internet and technology have
become a significant part of the modern world, 16 governments, lawmakers, and
politicians have long ignored its social and economic impact on modern day lives,
including, but not limited to, the taxation of cross-border online transactions. For this
reason further research is needed into the impact and problems associated with
technological advances, and more literature should be made available.
The third factor relates to the specialised nature of the literature in the field of
information technology. 17 A common misconception is that academic research into
computers, technology, and the Internet should be left to technophobes. A fact that
cannot be ignored is that each and every research field is either directly or indirectly
affected by technology. Accordingly, a study into the levying of VAT on cross-border
digital trade cannot be left to technophobes alone.
As a result of these three factors, no complete study currently exists that
comprehensively deals with the levying and collection of VAT on digital imports in
South Africa. The aim of this study is, therefore, to provide a thorough analysis of the
levying and collection of VAT on cross-border digital trade in South Africa with the
object of proposing amendments to the VAT Act that will lead to a modern VAT
collection policy that ensures the accurate levying of VAT on cross-border
transactions, and the effective collection of the VAT so levied.
14

16
17
15
1.3
Research question(s)
The nature of this project does not lend itself to any single question. Consequently
the following related questions will be examined.
1.3.1 What features of digital online shopping pose problems for VAT collection?
1.3.2 Which of these problems arise from the South African VAT collection system?
1.3.3 Do the current South African VAT laws apply to online digital imports into
South Africa, and to what extent do these laws adequately protect against
fiscal losses?
1.3.4 Have foreign jurisdictions with similar problems come up with proposals or
solutions, and to what extent can these be applied in South Africa?
1.3.5 What solutions - and problems associated with these solutions - have been
raised in the international arena, and to what extent can the solutions be
implemented in South Africa or globally?
1.4
Methodology
The importance of the study is emphasised by the interpretation of statistical data on

Internet use and online retail growth in South Africa. This data was published in
2012, and collected from a variety of sources. Given the variety of the sources, the
currency of the data, and correspondence between the statistical results, there is no
need for independent fieldwork to verify the data. For the purposes of this study it is
accepted that all statistical data are accurate. It should further be noted that digital
technology is constantly changing and expanding and possibilities are endless. For
this reason, certain of the solutions, ideas and scenarios might seem futuristic or
unrealistic. The majority of this study will, however, be based on a literature study
5
drawn from legislation, text books, professional subject journals, publications by

government departments, and case law. This study cannot be confined within
borders as the problems associated with the collection of consumer taxes on digital
online shopping, are a worldwide phenomenon. For this reason a comparative
analysis is undertaken. This comparative study will be limited to the application of the
harmonised VAT rules in the EU and the OECD proposals on consumption taxes.
While more modern VAT systems exists in Australia, Canada, New Zealand, and
Singapore, these will not be reviewed here to keep the scope of this inquiry
manageable. Furthermore, the VAT systems in Australia, Canada, and New Zealand
are not more advanced in the present context than the South African system, which
renders a comparative review of little value.
1.5
Limitations
The limitations inherent to each chapter are set out below in section 6.
1.6
Organisation of the study
The study is divided into seven chapters arranged as follows:
Chapter 1: Introduction, research question(s), methodology and organisation

This chapter serves as in introduction in which the background to and need for the
study are examined. The research question(s) are defined, and the scope and
methodology of the study are discussed.
Chapter 2: The rise of the Internet and e-commerce

Here a concise history of the development of the Internet and digital technology is
presented. The social changes that the Internet and digital technology have
occasioned and their impact on traditional retail shopping are also addressed. VAT
revenue statistics are compared to e-commerce growth statistics to determine
whether or not failure adequately to levy and collect VAT on cross-border digital
sales leads to an erosion of the tax base. Based on these statistics, current
technological trends, and consumer behaviour, predictions are made with an
emphasis on the fact that technological advances will continue to impact on social
behaviour and retail shopping trends.
Limitations
The following aspects are specifically excluded from the discussion in Chapter 2.
A technical analysis of the operation of the Internet and digital technology.
A psychological examination of human behaviour and social standards in

respect of new technology, the Internet, and e-commerce.
Theories, calculations, random tests, or any other test to determine the

authenticity and accuracy of statistical information.
Chapter 3: The collection of VAT on cross-border digital trade in South Africa

In this chapter an extensive analysis is made of the ability of the provisions in the
VAT Act, as it currently reads, to
(i) levy VAT on cross-border digital transactions; and
(ii) enable SARS effectively to collect VAT charged on cross-border digital
transactions.
In order fully to comprehend this analysis, a short history of the introduction of VAT
in South Africa and the characteristics of a VAT system are presented. In the
analysis answers to the following questions are sought:
7
Is there a supply of goods or services?
Where is the supply made?
When is the supply made?
What is the value of the supply?
Is it made by a taxable entity?
Is it made in the course or furtherance of an enterprise?
Is the supply taxable?
How is VAT on the transaction collected?
Limitations
The following aspects are specifically excluded from the discussion in Chapter 3:
A thorough analysis of the differences between a VAT system and a General

Sales Tax (GST) system.
An analysis of the characteristics of good and bad VAT systems.
An in-depth discussion of the levying and collection of VAT on goods that are
ordered electronically but delivered physically, while acknowledging that some
discussion of the tax collection methods in respect of such goods is necessary
for an understanding of the problems associated with the tax collection
mechanisms applied in cross-border digital trade.
An analysis of the taxation of illegal file sharing and copyright infringement.
A discussion on the constitutionality of the provisions in the Tax

Administration Act. 18
A complete analysis into the different provisions in respect of what constitutes

standard rated, zero-rated, and exempt supplies.
Chapter 4: The collection of VAT on cross-border digital trade in the EU

Since VAT as a consumption tax originated in Europe, a comparative study between
the application of VAT in the EU and in South Africa is necessary if possible
solutions for the problems associated with the levying and collection of VAT on
cross-border digital trade are to be identified. This chapter provides a thorough
analysis of the application of the harmonised VAT rules on cross-border digital trade.
18
Act 28 of 2011.
The discussion focuses not only on the position under the Sixth Council Directive
77/388/EEC, but includes a discussion of the amendments brought about by Council
Directives 2002/38/EC and 2008/8/EC (which should be read with reference to
Directive 2006/112/EC), as well as the amendments that will apply as from 1 January
2015 as envisaged by Council Directive 2008/8/EC. The discussion will centre
around the following questions.
Limitations
The following are specifically excluded from the discussion in Chapter 4:
An in-depth discussion of the application of the EU harmonised VAT rules in

each of the 27 EU Member States.
An in-depth discussion of the levying and collection of VAT on electronically

ordered but physically delivered goods. However, some discussion of the tax
collection methods in respect of such goods is necessary to determine the
effectiveness of the VAT collection mechanisms applied in the case of crossborder digital trade within the EU.
full
discussion
of
place-of-establishment
and
place-of-effective-
management rules in the case of a controlled foreign company.
An analysis of the taxation of illegal file sharing and copyright infringement.
Chapter 5: The OECD proposals on consumption taxes

This chapter presents a thorough analysis of the OECD proposals in respect of the
levying and collection of VAT on cross-border digital trade. Considerable emphasis is
placed on the proposed guidelines for the identification and location of customers by
taxable entities burdened with the task of tax collection. Alternative VAT collection
mechanisms are also critically examined with a view to establish an effective VAT
collection model that does not overburden suppliers and which can be applied with
the least cost to the fiscus. The discussion focuses on the following questions:
Limitations
The following are specifically excluded from the discussion in Chapter 5:
The difference between business income and income derived from the
exploitation of intellectual property for purposes of income (personal) taxes.
A technical discussion of technology-driven identification and location tools.
Chapter 6: VAT collection by financial institutions

This chapter offers an analysis of a real-time VAT (RT-VAT) collection model for the
collection of VAT by financial institutions. The operation of an RT-VAT collection
model is considered based on a schematic diagram. The benefits of this collection
model are discussed to identify solutions to the problems faced under the registration
and reverse-charge mechanisms. The main objections to this model - concentrating
10
specifically on the breach of the bankers duty of confidentiality and the customers
right to privacy - are examined. Arguments against these objections are proffered.
Limitations
The following aspects are specifically excluded from the discussion in Chapter 6:
A full discussion of the historical development and application of the bankers

duty of confidentiality in South Africa.
An in-depth examination of the customers right of recourse (either in contract

or in delict) in the case of breach of the bankers duty of confidentiality.
A discussion of a persons right to privacy, its limitations, and the right of

recourse in the case of infringement.
An analysis of cross-border money laundering, exchange control, and the

bankers statutory duty to report irregular transactions.
A discussion of online banking fraud and a customers possible right of

recourse against the bank.
An in-depth analysis of the rights of SARS (or any other revenue authority), as
either a statutory preferent or concurrent creditor, against the estate of an
insolvent taxpayer.
Chapter 7: Conclusion and recommendations

This chapter centres around a summary of the main findings in respect of the levying
and collection of VAT on cross-border digital trade. Recommendations are made for
the amendment of the current VAT Act to provide for the adequate taxation of crossborder digital trade.
1.7
Conceptualisation
In this study various concepts will be used. For ease of reference, definitions of the
main concepts are provided here.
business-to-business the cross-border transactions in either services or digital
products where the supplier is a registered VAT vendor in the country where he is
11
established, and the recipient is a registered VAT vendor in the country where he is
established; 19
business-to-consumer the the cross-border transactions in either services or
digital products where the supplier is a registered VAT vendor in the country where
he is established, and the recipient is not registered as a VAT vendor in the country
where he resides or is established; 20
cloud computing - computing resources (such as storage, monitoring, and
software) are delivered as a service over a network - for example, the storage of
information on various servers across the globe and linked to a network; 21
consumption tax - the generic term for the indirect taxation (sales tax or VAT) of
money spent on the consumption of goods and services; 22
cross-border digital trade - transactions concluded electronically over a network
between a customer who resides or is physically present in one jurisdiction, and a
supplier which is established or physically present in another jurisdiction, for the
supply of digital products that can be delivered electronically by means of a network;
digital product - an intangible product or thing capable of being transferred from
one electronic device to another via a network, infrared transmission, or Bluetooth; 23
e-commerce - the generic term used to describe the phenomenon when business
or transactions is conducted by electronic means through the application of digital
technology; 24
e-tailer - the supplier who supplies tangible or intangible goods at retail level
through the application of an e-commerce platform; 25
19
Van der Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 373.
21
Carrol M, Kotz P, and van der Merwe A (2012) Securing Virtual and Cloud Environments in Ivavnov I,
ShishkovB, and Van der Sinderen M (eds) (2012) Cloud Computing and Services Sciences at 73.
22
Weidenbaum ML, Raboy DG, and Christian ES (1989) The Value Added Tax: Orthodoxy and New Thinking at
xii; Westin RA (2006) WG & L Tax Dictionary at 138.
23
Cambridge Online Dictionary http://dictionary.cambridge.org/dictionary/british/e-tailer [accessed on 30
April 2013].
24
International Fiscal Association (2001) Taxation of Income Derived from Electronic Commerce at 24-25.
20
12
fractionated VAT - a VAT system where part of the total amount of VAT due by the
final consumer is collected in stages; 26
identification and location tools - the methods applied in e-commerce
transactions by a taxable entity to identify a customer and to locate that customers
presence or residence for VAT purposes; 27
IP address - the numerical label assigned to an electronic device (eg, computer,
mobile phone) interacting with a computer network that uses the Internet Protocol for
communication; 28
packet-switching technology - is a digital networking communications method
that groups all transmitted data regardless of content, type, or structure into
suitably sized blocks; 29
trusted third party - an agent that is required by law to collect taxes on behalf of a
revenue authority. 30
RT-VAT - a real-time VAT collection model in terms of which VAT is charged and
collected simultaneously and remitted to revenue authorities at 24 hour intervals; 31
turnover tax - a tax imposed on gross receipts. Before the introduction of VAT,
turnover taxes on alcohol sales were popular to raise revenue. 32
25
Cambridge Online Dictionary http://dictionary.cambridge.org/dictionary/british/e-tailer [accessed on 30

April 2013].
26
Van Arendonk H, Jansen S, and Van der Paard R (2011) VAT in an EU and International Perspective at 92.
27
OECD Verification of Customer Status and Jurisdiction
http://www.oecd.org/ctp/consumptiontax/5574687.pdf [accessed on 19 November 2012].
28
Defense Advanced Research Projects Agency (1980) DOD Standard Internet Protocol at 1
http://tools.ietf.org/html/rfc760 [accessed on 30 April 2013].
29
Roberts LG (1978) The Evolution of Packet Switching http://www.packet.cc/files/ev-packet-sw.html
[accessed on 30 April 2013].
30
OECD (2000) Report by the Consumption Tax Technical Advisory Group at 25
http://www.oecd.org/tax/consumptiontax/1923240.pdf [accessed on 24 August 2012].
31
Ainsworth RT and Madzharova B (2012) Real-Time Collection of Value Added Tax: Some Business and Legal
Implications Boston Univ School of Law Working Paper no 12-51 at 2
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166316 [accessed on 18 December 2012].
32
Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 3.
13
1.8
Conclusion
In this introductory chapter the purpose of the study, the research questions,
organisation, and delimitations have been set out. It should be noted that major
sources of erosion of the VAT base in most countries are due to exemptions, nonexport zero rating and other concessions such as teax incentive schems. Technical
issues such as e-commerce remain second order in nature. In order fully to grasp
the urgent need to modernise the South African VAT system, the effect that the
Internet and the advances in digital technology have on societys retail shopping
trends need to be examined. In the next chapter, the development of the Internet
and its impact on shopping trends are discussed with specific reference to the
possible erosion of the tax base.
14
CHAPTER 2:
THE RISE OF E-COMMERCE
Only six electronic digital computers would be required to satisfy the computing needs
of the entire United States.
- Howard H Aiken (1947)
2.1 Introduction
Many people hold different views on the Internet and digital technology. Some find it
so challenging that they avoid it at all costs, while others find it fascinating and have
reached a point in their lives where they can no longer live without the Internet and
digital technology. There are also some who believe that the Internet is just another
phase in history that will soon pass. Most governments and politicians hold this latter
view and they often follow a head in the sand approach, completely unaware of the
world that the Internet has created. In this chapter I give a brief history of the
development of digital technology and the Internet. I further discuss the social
changes that the Internet and digital technology have brought about, and the impact
they have had on retail shopping behaviour in South Africa. The nature of digital
technology will be examined with a futuristic glimpse of the possibilities it holds and
how these will affect e-commerce. I further examine VAT collection statistics from
2006-2011 and compare these to statistics on the growth of e-commerce in South
Africa.
These statistics will be applied to determine if the change in consumer
behaviour the change from tangible in-store to intangible online shopping - could
erode the tax base if the current VAT collection mechanisms are not amended to
adapt to new technological trends.
2.2 A brief history on the introduction of the Internet

2.2.1 From ARPANET to INTERNET
15
Unlike the history of other media tools such as the telephone and radio, the history of
the Internet is just beginning to be written. 33 Due to the rapid changes in and
expansion of technology, the Internet is constantly developing and its history is far
from complete. It is thus inevitable that any literature on the history of the Internet
will, by its very nature, be outdated from the outset.
Like most modern communication tools, the development of the Internet as a
communication medium was a product of war. The cold war between the USSR and
the USA, and the subsequent launch of Sputnik 1 (an orbital satellite) on 4 October
1957 by the USSR, created immediate global danger. 34 This contributed to the
establishment of the USA Advanced Research Projects Agency (ARPA). 35 One of
ARPAs most important projects was to investigate and develop technologies for
computers to interlink on a network. 36 The two-fold objective of this research was to
enable the transfer of information from different centres within ARPA, and to allow
participants to share scarce computer resources. 37 This first computer network was
created in 1969 and was christened ARPANET. ARPANET is generally accepted as
the origin of the Internet. 38
The idea of sharing information through a network or remotely operating a machine
via a network of some sort, did not originate within the realm of ARPA. George
Stibitz, a well-known researcher in Boolean logic digital circuits, invented the
Complex Number Calculator in 1940. 39 When he wished to demonstrate this
calculator at the American Mathematical Society in September 1940, he realised that
33

Slevin J (2000) The Internet and Society at 28; Ryan J (2010) A History of the Internet and the Digital Future at
11-16 and 23-24; Winston B (1998) Media Technology and Society: A History: From the Telegraph to the
Internet at 325; Abbate J (1999) Inventing the Internet at 8-9; Norman JM (ed) (2005) From Gutenberg to the
Internet: A Sourcebook on the History of Information Technology at 39.
35
24-25; Norman JM (ed) (2005) From Gutenberg to the Internet: A Sourcebook on the History of Information
Technology at 41.
36
Slevin J (2000) The Internet and Society at 28-29; Ryan J (2010) A History of the Internet and the Digital
Future at 26-27; Norman JM (ed) (2005) From Gutenberg to the Internet: A Sourcebook on the History of
Information Technology at 41.
37
28-30.
38
Slevin J (2000) The Internet and Society at 29; Schell BH (2007) The Internet and Society at 1 and 144; Ryan J
(2010) A History of the Internet and the Digital Future at 30.
39
Crosby K (1995) George Stiblitz http://ei.cs.vt.edu/~history/Stibitz.html [accessed on 31 May 2012]; Winston
B (1998) Media Technology and Society: A History: From the Telegraph to the Internet at 322; Norman JM (ed)
(2005) From Gutenberg to the Internet: A Sourcebook on the History of Information Technology at 39.
34
16
the computer was too large, heavy, and fragile to transport. 40 To avoid damage to
the machine, Stiblitz set up a teletype terminal enabling him to control the computer
remotely via a telegraph connection. 41 This was the first time that an object was
remotely controlled using a telecommunication tool.
Without the inventions and research by persons and institutions outside of ARPA,
ARPANET would not have got off the ground. One such invention was the
development of packet-switching technology communication. 42
Packet-switching
technology involves the breaking up of digitised information into labelled packets or

blocks indicating their origin and destination. 43 This technology allowed the transfer
of digitised information from one computer to another. 44 As the information is broken
up into blocks or packets, it can be sent through multiple routes shortening the
transfer time if one route is busy or not functioning. 45
These inventions, and the then futuristic concept advanced by some scientists that
computers should be applied as communication tools and not just to solve difficult
mathematical formulae, led to collaboration between ARPA and BOLT (a consulting
firm in Cambridge, Massachusetts) in the development of the ARPANET. 46
At the end of 1969 ARPANET was launched creating the first long distance computer
network connecting the University of California in Los Angeles, the Stanford
Research Institute in Menlo Park, California, the University of California, Santa
Barbara, and the University of Utah. 47 The network soon grew to over 10 sites with
40
Crosby K (1995) George Stiblitz http://ei.cs.vt.edu/~history/Stibitz.html [accessed on 31 May 2012]; Slevin J

(2000) The Internet and Society at 29.
41
Crosby K (1995) George Stiblitz http://ei.cs.vt.edu/~history/Stibitz.html [accessed on 31 May 2012]; Slevin J
(2000) The Internet and Society at 29; Winston B (1998) Media Technology and Society: A History: From the
Telegraph to the Internet at 322.
42
Slevin J (2000) The Internet and Society at 29; Winston B (1998) Media Technology and Society: A History:
From the Telegraph to the Internet at 322-323; Abbate J (1999) Inventing the Internet at 15-41.
43
Slevin J (2000) The Internet and Society at 29; Schell BH (2007) The Internet and Society at 37; Abbate J
(1999) Inventing the Internet at 15-41.
44
Slevin J (2000) The Internet and Society at 29; Schell BH (2007) The Internet and Society at 37; Abbate J
(1999) Inventing the Internet at 15-41.
45
Slevin J (2000) The Internet and Society at 29; Schell BH (2007) The Internet and Society at 37.
46
29; Winston B (1998) Media Technology and Society: A History: From the Telegraph to the Internet at 328;
Norman JM (ed) (2005) From Gutenberg to the Internet : A Sourcebook on the History of Information
Technology at 6.
47
17
an estimated 2000 users. 48 During October 1972, a public demonstration of

APRANET
was
held
at
the
first
International
Conference
on
Computer
Communications in Washington. This sets in motion discussions on the expansion of

APRANET to a global network. 49 The first international connection was set up at a
conference in Brighton, UK in 1973. 50 Data was sent via satellite to Goonhilly Downs
in Cornwall, from there by cable via the University of London to the Information
Sciences Institute in California, USA, enabling delegates to experience APRANET as
if they themselves were in the USA. 51 While the transfer of information on ARPANET
was very reliable due to the Network Control Protocol, the expansion of the
infrastructure caused information to get lost or compromised due to weak
connections or unreliable networks. 52 In 1972, Bob Kahn and Vin Cerf, who were
initially involved in setting up the Network Control Protocol, collaborated to set up a
Transmission Control Protocol (TCP) and an Internet Protocol (IP). 53 The TCP
organised digital data in packets and put them in the correct order at the desired
destination. 54
The IP routed the packets through the network. 55
By 1983, the
APRANET and all networks connected to APRANET were required to make use of
the TCP/IP Protocol. 56 This was soon to be dubbed the Internet. During these early
years of ARPANET, the network was reliant on its own network (cable) and/or
satellite system. Two Chicago students developed the telephone modem in the late
1970s and this allowed users to connect to the ARPANET via normal telephone
lines. 57 The introduction of the modem and the invention of personal computers,
were the most significant contributing factors to the world wide proliferation, bulletin
48

Slevin J (2000) The Internet and Society at 31; Abbate J (1999) Inventing the Internet at 79.
50
51
52
53
Slevin J (2000) The Internet and Society at 32; Schell BH (2007) The Internet and Society at 5; Ryan J (2010) A
History of the Internet and the Digital Future at 37-40.; Abbate J (1999) Inventing the Internet at 127-133;
Norman JM (ed) (2005) From Gutenberg to the Internet: A Sourcebook on the History of Information
Technology at 6.
54
Slevin J (2000) The Internet and Society at 32; Norman JM (ed) (2005) From Gutenberg to the Internet: A
Sourcebook on the History of Information Technology at 6.
55
Slevin J (2000) The Internet and Society at 32; Abbate J (1999) Inventing the Internet at 140-142.
56
57
49
18
board systems, and electronic discussion fora. 58
In 1983, the open nature of
ARPANET became a security risk and it was split into ARPANET (to be used for
research), and MILNET (exclusively for military use). 59 Since 1980, the ARPANETs
role as long distance network was gradually taken over by supercomputing centres
set up by the National Science Foundation (NSFNET), and by 1990 ARPANET had
been decommissioned. 60 The NSFNET was, however, exclusively used for research
and education. 61 The National Science Foundation initiated the privatisation and
commercial exploitation of the Internet in 1988, and gradually privatised key parts of
the Internet to companies like IMB and Merit Network Inc, until the NSFNET was
finally shut down in 1995 after all operations had been privatised. 62
Most Internet networks are now provided and maintained by commercial
enterprises. 63 This conceals huge legal barriers with expanding the reach of VAT,
including property rights, commercial law, privacy, et cetera. From the mid 1990s,
various enterprises initiated the use of TCP/IP protocols within their own
organisations creating mini Internet networks (Intranet). 64 These systems are for
exclusive use within the organisations, and are protected by firewalls. 65
Communication between these networks and the Internet is effected through Internet
gateways. 66
2.2.2 E-mail and the World Wide Web
58
Slevin J (2000) The Internet and Society at 32; Schell BH (2007) The Internet and Society at 5-7; Ryan J (2010)
A History of the Internet and the Digital Future at 51; Norman JM (ed) (2005) From Gutenberg to the Internet: A
Sourcebook on the History of Information Technology at 40.
59
90; Abbate J (1999) Inventing the Internet at 142-143.
60
61
62
63
64
Slevin J (2000) The Internet and Society at 34; Schell BH (2007) The Internet and Society at 2.
65
66
19
Communication and accessing information on the Internet required specialised

skills. 67 These skills required participants to remember and type difficult commands
or
transcribe
complicated
network
addresses. 68
This
hampered
the
commercialisation of the Internet from the outset. In 1971, Ray Tomlinson created
electronic mail (e-mail) in its user friendly form as it is known today by introducing the
universal mail address format like johnsmith@gmail.com. 69 From 1990 onwards, a
whole range of user-friendly applications were introduced to make communication on
the Internet easier. 70 These included better interface, a range of buttons, and pull
down menus from which commands could be chosen.
Before the introduction of the World Wide Web, users of the Internet had to trace
difficult routes and links to access information on the system. 71 If the location of the
information was not known to a user, he was unable to access it. Tim Berners-Lee
and Robert Cailliau of the European Laboratory of Particle Physics (CERN),
developed a system within CERN for storing, retrieving and communicating
information using hyperlinks and hypertext. 72 Today the World Wide Web can be
accessed by any person with an Internet connection. Information can be accessed
by means of a browser, and users are merely required to type the World Wide Web
address or Uniform Resource Locator (URL) to gain access to the webpage. Even if
the URL is not known to the user, search engines like Google can be accessed to
search for keywords in hyperlinks and hypertext to route the user to the correct URL
or web address.
interchangeably.
Today the terms Internet and World Wide Web are used
The
worlds
first
website
was
registered
in
1985
as
www.symbolics.com. 73 Although the World Wide Web was open for business in
67
69
Schell BH (2007) The Internet and Society at 4; Ryan J (2010) A History of the Internet and the Digital Future
at 77; Abbate J (1999) Inventing the Internet at 106.
70
77.
71
72
Slevin J (2000) The Internet and Society at 37; Schell BH (2007) The Internet and Society at 12-13.; Ryan J
(2010) A History of the Internet and the Digital Future at 107; Abbate J (1999) Inventing the Internet at 212216.
73
Schell BH (2007) The Internet and Society at 9.
68
20
1992, it was not until 1995 that the backbone of the Internet was finally handed over
to private telecommunication companies Sprint, Ameritech, and Pacific Bell. 74
Internet browsers are constantly being improved to allow users not only to access
information or webpages, but also to send and receive e-mail, listen to radio, watch
television, make and receive video calls, and play interactive video games without
having to switch between browsers/applications. This commercialisation and rapid
expansion of the Internet has had a major impact on society at large.
Another important development was the invention of an index system termed XML
(Extensible Markup Language). 75 Before the development of XML, the Internet was
one big disorganised reference book. 76 XML allows computer programmers to attach
tags or unified codes, which distinguish between a business name or telephone
number. 77 Today, XML is the backbone of electronic commerce as it is this system
which allows purchase orders be read universally and routed correctly. 78
2.3 What is digital technology?
It is often difficult for non-technically trained persons to understand what digital

technology entails. The purpose of this paragraph is not to explain digital technology
in technical terms. In this paragraph I attempt to explain how a digital computer and
some digital technology operate. This basic understanding of digital technology will
form a vital part of the discussion on VAT collection on digital online sales which is
discussed in the remainder of this thesis.
The very first computers were developed as mere calculating machines. 79
Computing technology underwent dramatic development and changes to become
the miracle machines that we operate today. 80 Digital computers fall in two
categories, namely, general or multi-purpose computers, and special-purpose
74
Winston B (1998) Media Technology and Society: A History: From the Telegraph to the Internet at 333.
76
77
78
79
Abbate J (2000) Inventing the Internet at 1.
80
rd
Abbate J (2000) Inventing the Internet at 1; Nashelsky L (1983) Introduction to Digital Technology 3 edition
at 3.
75
21
computers. 81 Special-purpose computers are designed to perform a specific task for example, to guide a missile or weld two pieces of metal together. Multi-purpose
computers, on the other hand, are designed to perform multiple tasks - for example,
play music, do financial bookkeeping, play games, et cetera. 82 In order for a
computer to perform the tasks it was designed to perform, it must be preprogrammed to read and process the command inputs by the user. 83 Special
computer language has been developed over years to programme the computer to
perform its tasks. These languages consist of arithmetic and algorithmic codes. 84
These codes are programmed into a Central Processing Unit (CPU) which reacts on
input commands to produce output units (see figure 2.1). 85
Input Demands
Keyboard, button,
voice command,
motion detection
Processing Unit (CPU)
Memory unit
Output unit
Play music, type
document, read text,
visual display,
calculate
Control unit
Arithmetic unit
Fig 2.1
Early computers demanded complex skills the user was required to type
commands in computer language to achieve the desired output. This process has
been simplified by computer programmes, and can now be achieved at the touch of
an actual button - like the play button on your radio - or by clicking or touching a
command reflected on a screen. As computer language is universal, most computer
programmes can run on different computers, and a command can be punched into
81
Nashelsky L
Nashelsky L
83
Nashelsky L
84
Nashelsky L
85
Nashelsky L
82
rd
(1983) Introduction to Digital Technology 3 edition at 3.

rd
rd
rd
(1983) Introduction to Digital Technology 3 edition at 6-8.
rd
(1983) Introduction to Digital Technology 3 edition at 4-5.
22
one computer while the output is processed by another computer. A simple example
is the remote control of your television. By pressing a button on your remote control
(computer 1), a command is sent to your television (computer 2) to perform a task,
for example changing a channel or increasing the volume.
Early computers stored information, arithmetic code, and algorithms in vacuum tubes
which were not only extremely large, but also dangerous. 86 These tubes were prone
to overheat and explode. 87 These were soon replaced by magnetic strip, CD, DVD,
and advanced hard drives (comprising magnetised material) that can store more
information on smaller devices. 88 As the need for smaller storage devices with a
higher storage capacity increases, researchers are constantly exploring new digital
storage methods and improving the storage capacity of hard drives. 89 These digital
storage methods include, but are not limited to, MP3, MP4, AAC, and DivX file
formats.
2.3.1 MP4, MP3, AAC and Divx
In the early years of digital technology development, it was often difficult to send
information from one device to another due to the size of the information and the
limitations of the Internet network. It often required the transfer of the physical
storage device from one machine to another. For example, Audio and Video files
were stored on magnetic tape. Without an intelligent super computer, it would have
been impossible to transfer Audio or Video files without transferring the magnetic
tape from one device to another. As a result of the complexity of Audio and Video,
these files take up a great deal of storage space. The widespread use of computers,
and an increasing availability of faster Internet connectivity at Universities and
86
rd
Nashelsky L (1983) Introduction to Digital Technology 3 edition at 4.

rd
Nashelsky L (1983) Introduction to Digital Technology 3 edition at 4.
88
rd
Nashelsky L (1983) Introduction to Digital Technology 3 edition at 5; Kryder MH and Kim CS (2009) After
Hard Drives what Comes Next IEE Transactions on Magnetics vol 45 no 10 at 3406
http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=5257331 [accessed on 6 June 2012].
89
Kryder MH and Kim CS (2009) After Hard Drives what comes next IEE Transactions on Magnetics vol 45 nr
10 at 3412 http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=5257331 [accessed on 6 June 2012].
87
23
businesses, have led to the development of digital encoding technology. 90 Mpeg 1layer 3, Mpeg 1-layer 4, Mpeg 2 Advanced Audio Coding (AAC), and Divx are all
encoding formats used for Audio and or Video files allowing the user to encode the
file into smaller packets (BITS), transfer the packets from one device via a network
and decode the file using a decoding programme, like an Mpeg-player, on another
device (see fig 2.2). 91 Files can be permanently encoded using Mpeg or lossy
compression encoding without significant loss in audio or video quality.
Original Audio
and Video file
input
Mpeg
encoding
process
Audio and video in

reduced format
USER A
Internet transfer
Original Audio
and Video file
displayed
Mpeg
decoding
process
USER B
Fig 2.2
Sharing video and audio files no longer requires the physical sharing of magnetic
tapes, CDs, or DVDs. User A can encode the original file in smaller chunks and
transfer it via an Internet network to user B, who can decode and enjoy the original
(in this case an exact copy of the original) file as can be seen in figure 2.2. Digital
90
th
Brandenburg K (2009) MP3 and AAC Explained AES 17 International Conference on High
Quality Audio Coding at 1 http://telos-systems.com/techtalk/hosted/Brandenburg_mp3_aac.pdf
[accessed on 7 June 2012].
91
th
Brandenburg K (2009) MP3 and AAC Explained AES 17 International Conference on High Quality Audio
Coding at 1-2http://telos-systems.com/techtalk/hosted/Brandenburg_mp3_aac.pdf [accessed on 7 June
2012]; McCandles M (1999) The MP3 Revolution IEEE Intelligent Systems May/June at 8.
24
encoding technology has had a tremendous impact on Internet user profiles and ecommerce (see the discussion below).
2.4 The impact of the Internet on society
In order to understand transformations in society, one must recognise the role that
transformation plays and the impact it has. 92 The Internet has expanded at a rapid
rate and has integrated various forms of traditional communication methods
including, but not limited to, letter writing (e-mail being the Internet version), radio
(streaming audio), newspapers, telephone (Skype and Google voice call), and
television (Youtube). 93
In a digital Internet-driven world, society has become
completely dependent on an Internet connection - so much so that it affects the way

we live, what we do, what we decide, and what we will become. That said, many
rural third world societies do not have access to the Internet and will probably never
be able to reap the benefits of the Internet during their lifetime. In examining the
impact of the Internet and its future capabilities, one should be careful not to be over
futuristic and keep rural Internet-less people and countries in mind. This should,
however, not distract us from the potential that the Internet holds or the problems
associated with that future. The unpredictability of the information technology
environment requires an active approach in anticipating its consequences, problems
and uncertainties, and the capacity actively to deal with this. 94 If this is not done at
an early stage, massive problems can be created which crisis management will not
be able to deal with. In order to develop and exploit the Internet positively, an
informed understanding and firmer grasp of what it involves is required. 95
The Internet has the potential to create a globalised community that can instantly
connect strangers around the world. It has no boundaries. The difference between
real time and space, versus virtual time and space, cannot be determined. That said,
without people a virtual world cannot exist. 96
92

94
95
96
93
25
2.4.1 Rapid growth in users
The global scope of the Internet means that user statistics are, at best, an estimate
and by no means accurate. These statistics are often negatively impacted by the
anonymity of Internet users at Internet cafs and public WIFI spots. Nevertheless, on
the whole, these statistics fairly reflect user trends and growth.
By 1999, the total number of Internet users was estimated at between 150 and 180
million compared to the 2000 users in 1969, and 90 000 users in 1989. 97 The
majority of these users were based in the USA. 98 By 1999, Finlands Internet
penetration rate was the largest in the world at 35 per cent, while the USA ranked
second at 30 per cent. 99 By 31 December 2011, the worlds Internet population was
estimated at 2 267 233 742 users of whom 44,8 per cent were based in Asia. 100 In
South Africa alone, Internet usage has grown by 25 per cent from 6,8 million users in
2010, to 8,5 million users in 2011. 101 This equates with an Internet penetration rate
of seventeen per cent. 102 Despite the rapid growth, South Africas Internet
penetration rate is low compared to other African countries like Nigeria (49 million
users: 29 per cent penetration), 103 Egypt (21,6 million users: 26 per cent
penetration), 104 and Kenya (10,4 million: 24 per cent penetration). 105 The availability
of smart phones is the principal reason for higher Internet penetration rates in
97
Slevin J (2000) The Internet and Society at 31 and 40; Schell BH (2007) The Internet and Society at 12.
Slevin J (2000) The Internet and Society at 40-41.
99
100
Internet World Stats (2011) World Usage and Population Statistics www.internetworldstats.com [accessed
on 4 June 2012].
101
Goldstuck A (2012) Internet Matters: The Quiet Engine of the South African Economy at 1
http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012]; Central
Intellegence Agency (2012) Africa: South Arica in World Factbook
https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html [accessed on 18 September 2012].
102
http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012].
103
104
105
.http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012].
98
26
developing countries. 106 That said, the physical infrastructure and Internet
connection in these countries are limited to major centres. 107 South Africas relatively
low penetration rate can be attributed to high broadband costs and a lack of
infrastructure in rural areas. 108 Despite the exorbitant/prohibitive cost of Internet
devices and services, and an undeveloped rural cabling network and poor mobile
coverage, it is anticipated that a fifth of all Internet traffic in Africa will be carried by
mobile networks by 2015. 109 This is a conservative estimate considering that Africa
has the second largest mobile connection rate in the world with over 616 million
subscriptions. 110 It should be noted, however, that not all mobile phone users are
smart phone users. This notwithstanding, mobile networks across Africa are
migrating to 3G and 4G networks increasing the demand for smart phones. This
could dramatically increase the number of Internet users. Furthermore, mobile
Internet device manufacturers like Huawei, are making more affordable smart
phones available in Africa. 111
2.4.2 Internet user profiles
When the APRANET was first introduced in 1969, its primary purpose was to store
and share information over distance without compromising its integrity. In other
words, the idea was that users would be able to communicate with each other and
share information securely and instantly. Although the telegraph and telephone were
instant, they were not secure. The postal service was neither instant nor secure.
From these early days it was clear that e-mail would be the most valuable tool of the
106
107
108
109
Jotischky N (2011) Press Release: Informa Telecoms and Media Report Examines the State of Broadband in
Africa http://blogs.informatandm.com/3515/press-release-informa-telecoms-media-report-examines-thestate-of-broadband-in-africa/ [accessed on 5 June 2012].
110
Reed M (2011) Press Release: Africa is the Worlds Second Most Connected Region by Mobile Subscriptions
http://blogs.informatandm.com/3485/press-release-africa-is-world%e2%80%99s-second-most-connectedregion-by-mobile-subscriptions/ [accessed on 5 June 2012].
111
News24 (2013) Huawei Launches Africa-only Smartphone
http://www.news24.com/Technology/News/Huawei-launches-Africa-only-smartphone-20130205 [accessed on
31 March 2013].
27
Internet. 112 No cheaper, more efficient way of instant communication exists,

especially when time-zones or working hours differ. 113 Even today, despite the
various activities made possible by the Internet, e-mail is still the most commonly
used Internet tool in the world. 114
Apart from e-mail, the Internet was for most of its existence principally used for
sharing information. Academics from various institutions, shared research findings
and scholars were able to search the Internet for information. It operated much like a
library. In 1990, the Internet was fast starting to shed its reputation of being an
academic tool to search for information. 115 Soon chat rooms were created, 116 and the
number of non-academic communications and file sharing increased dramatically. It
was not until the second half of the 1990s that the Internet became the platform for
commercial trade as commercial activity was forbidden under the National Science
Foundation Acceptable Usage Policy. 117
2.4.2.1 The start of e-commerce

The first item sold on eBay was a broken laser pointer. 118 The founder of eBay,
Pierre Omidyar, was amazed that someone would buy something as mundane as a
broken laser pointer until he found out that the buyer was a collector of laser
pointers. 119 By the end of 1996, eBays Internet sales turnover reached USD 7,2
million. 120 The high demand for goods sold on eBay, proved that the Internet is a
valuable marketplace and that it can become a valuable tool for e-commerce. 121 Paul
Baran, one of the pioneers of computer development, predicted as early as 1968,
that people will someday day be able to connect to an electronic shop that sells
112
114
115
116
117
Ryan J (2010) A History of the Internet and the Digital Future at 120.
118
119
120
121
113
28
virtually anything from the comfort of their own homes. 122 That said, critics like Brian
Winston opine that There is also little to support the idea that the net will become a crucial method of
selling goods and services. Every system for avoiding shopping from the mail-order
catalogue to the cable television shopping channel has never done more than
provide, albeit often profitably, niche services. One of the sillier facets of
Information Revolution rhetoric is the belief that technology is urgently required to
help people avoid going shopping or travelling on business. People like shopping
and travelling-just as they like being told, or reading, stories. So we do not need
stories to be more interactive than they have been since the dawn of time; a liking
for travel is why business people have avoided the lure of the video-conference
phone for nearly two-thirds of the twentieth century; and we so love shopping we
have made the shopping mall
123
To some extent, Winston is correct that we love shopping and we love travelling.
However, the convenience of an instant meeting via video-conference, and the
increasing cost (including the cost to the environment) of long distance travel,
together with the time wasted in travelling, has made video and audio streaming a
popular business tool in recent years. Although shopping is often seen as
pleasurable leisure activity, the very lack of time to shop during actual shopping
hours has made e-commerce an attractive alternative where shopping is not
restricted to specific business hours or geographical areas. For example, A who lives
in a rural area at least three hours drive from the nearest mall, can now order and
purchase goods from an online shop and have it delivered. Not only does ecommerce save him the time of driving to a mall, but it also saves him the
disappointment of not finding what he was looking for at the mall.
The biggest frustration that e-commerce creates (although the phenomenon is not
limited to e-commerce) is the lack of timely and secure delivery. 124 Three main
reasons exist why e-commerce has not evolved into the only or main form of
shopping namely -
122
Winston B (1998) Media Technology and Society: A History: From the Telegraph to the Internet at 335-336.
124
Lee HL and Wang S (2001) Winning the Last Mile of E-commerce MIT Sloan Management Review Summer
at 54.
123
29
(i) consumers still enjoy an interactive shopping experience where products can be
looked at, touched and tested before it is purchased
(ii) shopping malls offer instant delivery whereas delivery via e-commerce is
dependent on courier or postal service which is not only slow and unreliable, but also
costly
(iii) the non existence of an Internet infrastructure, poor connections, and high
broadband costs has deprived many possible e-consumers from the market.
Nevertheless, technological advances in digital media can alter shopping patterns
dramatically to increase the demand for e-commerce. 125 With the introduction of
Mpeg, Divx, and other digital encoding processes, physical delivery of items is no
longer the only form of delivery. Books, video, audio, games, software and similar
items can now be purchased and instantly downloaded by the purchaser without
receiving any tangible item. Dematerialisation has numerous benefits including close
to zero delivery costs, instant delivery, and greater consumer choice. 126 For example,
a traditional music store sells music compilations on CD. Although it might stock a
wide variety, the consumer is still limited to the compilations compiled by the
retailer/manufacturer. The same consumer can compile his own compilation when
purchasing music song for song online. Dematerialised goods do not require
packaging (postage), printing (books), or magnetised storage devices (CD, DVD),
and can be sold at a fraction of the cost of the materialised product. Dematerialised
goods, furthermore, enable shoppers to purchase goods in foreign countries and
import these to their home country without incurring shipment costs. Consumers are,
as a result, exposed to products that they would normally not have been exposed to
if it were not for the Internet and e-commerce.
In addition, encoding of files has made their transfer fast, easy and convenient.
Depending on the type of media transferred, the smaller packets (bits) of digitally
encoded files can be transferred to a mobile device without using excessive amounts
125
at 55.
126
at 57.
30
bandwidth. Bandwidth is the common term used in computing to refer to the amount
of data communication consumed.
2.4.2.2 How does e-commerce work?
Many traditional transactions can be concluded online including retail shopping,

banking, gambling, and the payment of accounts. For purposes of this thesis I shall
limit the discussion to online retail shopping. Online retail shopping can be divided
into two main categories: materialised e-commerce and dematerialised e-commerce.
2.4.2.2.1 Materialised e-commerce
The traditional shopping experience is characterised by a chain of events that can be

summed up as follows
the consumer identifies his needs - for example, he wants to read a book
the possible retail outlet is identified and the consumer drives to the store
the consumer searches for the book he wants, finds it and reads the front and
back covers or even pages through the book
a decision is made and the book is purchased (in cash or by card) at the
cashier and the consumer returns home to enjoy the book.
Although very similar, in the case of materialised e-commerce, the consumer and
merchant are not in each others presence. In fact, the merchant is often not even
aware that a consumer is busy concluding a transaction with him, because the
process is partially automated. In materialised e-commerce the chain of events can
be summarised as follows
the consumer identifies his needs - for example, he wants to read a book
31
the possible online store is identified based on the consumers trust, word of
mouth, or a search on the Internet
the consumer browses through the online store, finds the book he is looking
for, and reads through the product description or reviews
a decision is made and the consumer places an order by clicking a button or

dragging the item to his online shopping basket
the merchants system determines the availability of the item and calculates
delivery costs to the consumer
the consumer accepts the price and shipment costs and supplies his credit
card details or makes an online electronic funds transfer (EFT) payment
the merchant acknowledges receipt of payment and ships the book to the
consumer.
Materialised e-commerce mostly delays the consumers enjoyment of the product

due to longer delivery times. That said, consumers are often exposed to a greater
variety of goods not commonly available in-store or which the store is not willing to
stock. Depending on the merchants shipping policy, materialised e-commerce is not
restricted to geographical areas and goods can be purchased from anywhere in the
world.
2.4.2.2.2 Dematerialised e-commerce
While materialised e-commerce is partially automated, dematerialised e-commerce

is fully automated. I refer to materialised e-commerce as partially automated
because human interaction is still required to fulfil the order (package and ship the
order). In the case of dematerialised e-commerce, the only human interaction
required is when the consumer initiates the transaction process (that is, if the
consumer is required to initiate the transaction). The characteristic chain of events is
as follows:
the consumer identifies his needs for example, he wants to read a book;
32
the online store is identified based on trust, previous experience, or an

Internet search;
the consumer browses through the online store finds the book and reads
through the description or reviews, or pages through the electronic book;
a decision is made and the consumer purchases the book by clicking on a

button and entering his credit card details or by making an electronic funds
transfer (EFT) payment;
the merchants system encodes the electronic book into smaller packets
(Mpeg or similar file format) and sends it via a network to the consumer;
the consumer decodes the file received and reads the electronic book on a
device (Kindle or e-book reader).
Delivery of dematerialised goods is instantaneous, depending on the size of the file

being transferred, network traffic, and the speed of the receiving device. Large files
and heavy network traffic can reduce the delivery time to a few minutes or hours. It
should, however, be noted that the delivery time may be delayed by these factors
while the delivery process starts immediately after the sale has been concluded.
Since no packaging or shipment is required, merchants can deliver dematerialised
goods anywhere in the world at a fraction of the cost of traditional delivery methods.
In addition, dematerialised goods like e-books are relatively cheaper than actual
books because there is no printing cost.
These factors make dematerialised e-
commerce an attractive option for consumers. However, pricing does not always
reflect the lower cost of production of dematerialised goods.
2.4.3 E-commerce in South Africa
E-commerce in South Africa is still in its infancy. This is partly due to high Internet
costs and user trust issues. Fixed line Internet in South Africa is costly. Fixed line
rental currently costs R140 per month which excludes data usage which is billed
33
separately. 127 The high cost of mobile bandwidth and line rental costs, are beyond
the reach of most South Africans. 128 In 1990, only 3,5 per cent of households owned
computers. 129 In 2011, the number of households in South Africa with computers
rose to 7,5 per cent. 130 In addition, fixed line networks are mostly limited to urban
areas, although several network operators are expanding their optic fibre networks in
rural areas. 131
Internet penetration is determined by the number of Internet users divided by the
population. 132 An Internet user, in turn, is defined as a person of two years or older
who accessed the Internet over a 30 day period. 133 A target has been set to attain 80
per cent Internet penetration across Africa by 2020. 134 This target will include
connections in all major cities, towns, and villages bringing the Internet within reach
of virtually all Africans. 135
127
http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012]; Fuchs C and
Horak E (2006) Africa and the digital divide Telematics and Informatics vol 25 issue 2 at 102
http://www.sciencedirect.com/science/article/pii/S0736585306000359 [accessed on 13 June 2012] .
128
http://www.sciencedirect.com/science/article/pii/S0736585306000359 [accessed on 13 June 2012].
129
Wilson EJ and Wong K (2003) African Information Revolution: A Balance Sheet Telecommunications Policy
vol 27 issue 1-2 at 158-159 http://www.sciencedirect.com/science/article/pii/S0308596102000976 [accessed
on 13 June 2012]; Darley WK (2003) Public Policy Challenges and Implications of the Internet and Emerging Ecommerce for sub-Saharan Africa: A Business Perspective Information Technology Development vol 10 issue 1
at 5-6 http://onlinelibrary.wiley.com/doi/10.1002/itdj.1590100102/pdf [accessed on 13 June 2012].
130
131
132
Aguiar M, Boutenko V, Miceal D, Rastogi V, Subramanian A, and Zhou Y (2010) The Internets New Billion
http://www.bcg.com/documents/file58645.pdf [accessed on 13 June 2012].
133
Aguiar M, Boutenko V, Miceal D, Rastogi V, Subramanian A, and Zhou Y (2010) The Internets New Billion
http://www.bcg.com/documents/file58645.pdf [accessed on 13 June 2012].
134
SAPA (2012) Pan African Connectivity by 2020-Pule News 24 7 June 2012
http://www.news24.com/SciTech/News/Pan-African-connectivity-by-2020-Pule-20120607 [accessed on 13
June 2012].
135
http://www.news24.com/SciTech/News/Pan-African-connectivity-by-2020-Pule-20120607 [accessed on 13
June 2012].
34
Despite the low Internet penetration, mobile penetration in South Africa is high. 136
Approximately 63 million SIM cards are in use, which translates to 126 per cent
penetration. 137 At least 20 per cent of SIM connections are for dual SIM usage,
switchboard systems, and asset management (to track vehicles). 138 Entirely accurate
figures are not available, but the true user base is estimated at around 40 million
users which translates to an 80 per cent penetration. 139 It should, however, be noted
that these statistics reflect the number of SIM card users and not smart phone users
(or users of phones which enable the user to connect to the Internet). Mobile SIM
cards can also be used to connect to mobile Internet using a mobile modem.
While SIM registration statistics cannot reflect smart phone usage, it should be noted
that smart phones are increasingly becoming more affordable and mobile Internet
connections more readily available. Non-smart phones are being phased out, and
the majority of new mobile contracts or mobile upgrades, include a smart phone or a
phone capable of connecting to the Internet.
World Wide Worx has observed that rural South Africans are more likely to play
games on their mobile phones and explore the connection capabilities of their
phones, than urban South Africans. 140 At present, these users mainly connect to the
Internet to connect to and use social networks. 141 However, a survey by Mobility
reveals that, in 2011, 37 per cent of South Africans in urban and rural areas over the
136
Wilson EJ and Wong K (2003) African Information Revolution: A Balance Sheet Telecommunications Policy
vol 27 issue 1-2 at 159 http://www.sciencedirect.com/science/article/pii/S0308596102000976 [accessed on 13
June 2012]; Johnston G and Pienaar S (2013) Value-Added Tax on Virtual World Transactions: A South African
Perspective International Business and Economic Research Journal vol 12 no 1 at 71
http://www.cluteinstitute.com [accessed 12 April 2013]; Central Intellegence Agency (2012) Africa: South
Arica in World Factbook https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html
[accessed on 18 September 2012].
137
http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012]; Central
Intellegence Agency (2012) Africa: South Arica in World Factbook
https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html [accessed on 18 September 2012].
138
139
140
141
35
age of sixteen used cellular phone banking on a regular basis. 142 If these mobile
users continue the trend of exploring their mobile phones capabilities, user trends
will soon alter from social networking to online shopping, gaming, and gambling. In
2002, when mobile Internet or Internet enabled mobile phones were rolled out in
South Africa, very few mobile users in fact used the facility. 143 The experimental
nature of user trends has, however, resulted in an increase in mobile Internet usage.
This is evident from the current mobile packages sold by Mobile Service Providers.
These packages are made up of voice and data packages.
E-commerce in South Africa comprises of traditional retail carried on online (tangible
goods delivered to consumers), dematerialised retail (software, music, video
downloads), and other intangible sales of tangible services (flight tickets,
entertainment tickets, car rental). 144 Online airline ticket sales make up most of
South Africas online sales, although statistics show a decline in growth. 145 Businessto-consumer online sales have shown a steady year on year growth of between 3035 per cent from 2006 to 2011. 146 Figure 2.3 below shows the growth in online sales
(excluding online airline ticket sales) expressed in millions of South African Rand for
the period 1996 to 2011. 147
142
Jacks M (2011) ABSAs CashSend boosts cell phone banking in SA The New Age
http://www.thenewage.co.za/16885-1025-53-Absa%E2%80%99s_CashSend_boosts_cellphone_ba...
143
Brown I, Cajee Z, Davies D, Stroebel S (2003) Cell Phone Banking: Predictors of Adoption in South Africa-an
Exploratory Study International Journal of Information Management vol 23 issue 5 at 382
144
145
146
147
36
3000
2500
2000
ZAR millions
1500
Online sales
1000
500
0
1996
1998
2000
2002
2004
2006
2008
2010
Fig 2.3 148

These statistics, however, only indicate the growth in e-commerce, and do not break
down the specific user trends - for example, whether the majority of online shoppers
have shifted their traditional retail needs to online shopping, or whether an increase
in dematerialised goods can be traced. Little to no research has been done to
determine online shopping trends in South Africa. 149 According to a study by World
Wide Worx, the increasing number of Internet users has had very little effect on the
growth in e-commerce in South Africa. 150 Instead, the growth in e-commerce can
largely be attributed to existing Internet users who have had an Internet connection
since 1996. 151 This is partly due to users gaining confidence in the Internet, and their
curiosity to explore gaining the upper hand. User trust is often gained by adopting
secure payment systems and fast and efficient delivery. 152 Although the average
Internet user would not be able to determine the trustworthiness of a payment
system, he or she is likely to trust familiar information resources such as well known
148
149
150
151
152
Barnard L and Wessen JL (2003) Usibility Issues for E-commerce in South Africa: An Empirical Investigation
SAICSIT Conference Proceedings at 259 http://delivery.acm.org/10.1145/960000/954042/p258barnard.pdf?ip=163.200.81.9&acc=ACTIVE%20SERVICE&CFID=110022166&CFTOKEN=84989978&__acm__=13
39506495_0c2d5a65de9a68f6b780e05ba97e949a [accessed on 12 June 2012]; Brown I, Cajee Z, Davies D,
Stroebel S (2003) Cell Phone Banking: Predictors of Adoption in South Africa-an Exploratory Study
International Journal of Information Management vol 23 issue 5 at 382
37
emblems. 153 Gaining the consumers trust and confidence takes time and is often
only established by word of mouth. Many users will adopt a certain user profile like
online shopper, gamer, or banker, based on the users self-confidence and ability to
operate as such. 154 Some users are reliant on the confidence of others, and are
more likely to explore the Internet and e-commerce if their role models or influential
persons are confident e-commerce users, or have persuaded them to become ecommerce users. 155 Thus, there is a direct relation between the length of time that a
person has been an Internet user, and his or her willingness to engage in social
networks, online banking, and online shopping. 156 Statistics created by World Wide
Worx show that it takes approximately five years for the average Internet user to
establish a network connection and become confident enough to take part in social
media and e-commerce. 157 This means that the rapid growth in Internet connections
from 2008-2011 will result in a rapid growth in e-commerce from 2013-2016. The
increasing number of smart phone users will inevitably result in even greater growth
in e-commerce in years to come. That said, this prediction only indicates the
potential or readiness of current Internet users to take part in social networks and ecommerce in future, but does not mean that all of the current users will in fact do so.
Online shopping should still be compatible with the Internet users lifestyle before the
user will engage in it. 158 For example, if the Internet user has the time to shop in a
153
SAICSIT Conference Proceedings at 259 http://delivery.acm.org/10.1145/960000/954042/p258barnard.pdf?ip=163.200.81.9&acc=ACTIVE%20SERVICE&CFID=110022166&CFTOKEN=84989978&__acm__=13
39506495_0c2d5a65de9a68f6b780e05ba97e949a [accessed on 12 June 2012].
154
155
http://www.sciencedirect.com/science/article/pii/S0268401203000653 [accessed on 13 June 2012]; Uzoka
FME, Shemi AP, Seleka GG (2007) Behavioural Influences on E-commerce Adoption in a Developing Country
Context The Electronic Journal on Information Systems in Developing Countries vol 31 issue 4 at 4.
156
http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012]; Brown I,
Cajee Z, Davies D, Stroebel S (2003) Cell Phone Banking: Predictors of Adoption in South Africa-an Exploratory
Study International Journal of Information Management vol 23 issue 5 at 385
157
158
http://www.sciencedirect.com/science/article/pii/S0268401203000653 [accessed on 13 June 2012]; Uzoka
38
mall and prefers to touch, feel and explore a product before buying it, he or she will
most likely not engage in online shopping. Similarly, a person who works long hours
and who has usually relied on others to buy goods according to his needs, is more
likely to engage in e-commerce for the sheer convenience thereof. Additional factors
include the complexity of e-commerce websites and whether goods can be used for
a trial period, and can, if found unsuitable, be returned or exchanged. 159
For
example, software users are more likely to purchase and download software if the
manufacturer/seller allows the user to try out the software for a trial period.
During the 2006 e-commerce boom, most South African corporations were not ready
to serve their online customer base. 160
This e-commerce boom was specific to
South Africa and can largely be attributed to five factors: a dramatic increase in the
use of smartphones, and the ability to access the Internet on these phones; the
growth in ADSL connections in small and medium enterprises; an increase in new
types of services and service providers which resulted in better competition; the
popularity of social networking among South Africans; and the development and
rapid increase in local content on the Internet. 161 Some of the retailers that were
operating an online shop were found to be inefficient or not user-friendly, or did not
offer the same variety of goods as the brick and mortar retailer. 162 Many of the
consumers were confident enough to use the Internet to find other corporations that
were able to meet their needs. 163 These corporations were mainly foreign Amazon.com, for example. If South African corporations will again not be ready from
FME, Shemi AP, Seleka GG (2007) Behavioural Influences on E-commerce Adoption in a Developing Country
Context The Electronic Journal on Information Systems in Developing Countries vol 31 issue 4 at 4.
159
160
161
162
SAICSIT Conference Proceedings at 261-266 http://delivery.acm.org/10.1145/960000/954042/p258barnard.pdf?ip=163.200.81.9&acc=ACTIVE%20SERVICE&CFID=110022166&CFTOKEN=84989978&__acm__=13
39506495_0c2d5a65de9a68f6b780e05ba97e949a [accessed on 12 June 2012].
163
39
2013 onwards to meet the online demand, consumers will find services elsewhere,
most likely in foreign jurisdictions. 164
In a survey compiled by Lunchboxmedia to determine the gay and lesbian consumer
profile for 2012, it was found that 99 per cent of the respondents were connected to
the Internet. 165 The survey revealed that 81 per cent of the respondents were regular
online shoppers. 166 Some 26 per cent of these purchases were computer software,
37 per cent were music, eighteen per cent were games, 40 per cent were videos,
and 54 percent were books. 167 The survey does not indicate whether these goods
were purchased as materialised or dematerialised goods, thus making it difficult to
determine if materialised goods are more popular than dematerialised goods, or vice
versa.
These surveys highlight an important consumer trend for the purpose of this study:
Online shopping is a growing phenomenon in South Africa.
2.5 The future of e-commerce
Many e-commerce critics, for example Winston, are of the view that e-commerce is a
mere phase that society is going through, that it will not last long, or that it will
remain a niche market for a few select individuals. If world e-commerce statistics are
anything to go by, such critics have already been proven wrong. Does that mean that
e-commerce will in future replace traditional forms of retail? I do not think so.
Winston correctly points out that we enjoy shopping and travel. E-commerce is a
convenient alternative to traditional shopping and can be used to purchase goods
that would normally not be available in-store or even in the country, but online
164
165
Luncboxmedia (2012) Consumer Profile 2012
http://gallery.mailchimp.com/dfa1cdd21fdb981ee645eff3d/files/LBM_Gay_Consumer_Profile_2012.pdf
166
Luncboxmedia (2012) Consumer Profile 2012
167
These results are not mutually exclusive and some overlap may occur. See Luncboxmedia (2012) Consumer
Profile 2012
40
shopping will not replace traditional retail shopping in its entirety. For example,
although it takes less time and effort to purchase a mattress online, the only way to
find the right mattress for your body contour and sleeping patterns is to try it in-store.
What does the future of e-commerce then hold? Will it always merely be a
convenient alternative? The answer to these questions lies in current trends.
2.5.1 Materialised e-commerce
While materialised e-commerce creates the convenience of shopping from the

comfort of your home or office, it often lacks the immediate availability of goods that
traditional shopping offers. Materialised e-commerce and traditional shopping are
therefore regarded as competing markets. To compete with traditional shopping,
materialised e-commerce must offer a wider variety or better pricing to make up for
the delay in delivery. The convenience of unlimited shopping hours, a wider variety,
and cheaper pricing (including shipping fees), are the three main reasons why a
consumer would choose materialised e-commerce above traditional retail shopping.
These reasons do not outweigh the convenience of immediate delivery especially
when goods are urgently required. I can therefore safely surmise that, although
materialised e-commerce will become increasingly popular, it will not replace
traditional retail shopping.
2.5.2 Dematerialised e-commerce
Unlike materialised e-commerce, dematerialised e-commerce is not put at a

disadvantage to traditional retail shopping because of time-consuming, costly
delivery. Instant delivery, lower prices (because no packaging and shipment are
required), and shopping that is not confined to trading hours, make dematerialised ecommerce an attractive alternative to traditional retail shopping.
Information and entertainment goods that were traditionally printed or stored on vinyl
or magnetised storage devices (tape or CD), are now increasingly generated
41
electronically. 168 The cost of storage devices, printed books, and packaging has
contributed to the need for dematerialised versions of books, music, software, and
information. In addition, the carbon footprint of manufacturing books and delivering
these to the consumer has resulted in environmentally conscious consumerism.
Early reactions to the Internet were characterised by predictions that the Internet
would, in future, replace printed books. 169 These reactions were based on statistics
showing that television had resulted in a major decline in newspaper sales. 170
Despite the decline in newspaper sales, to date neither television nor e-newspapers
has replaced printed newspapers. The main reason could be attributed to low
Internet penetration rates and poor television signals. That said, early predictions
can resurface as a result of the increasing availability of mobile Internet, Internetenabled telephones, and other Internet-enabled personal portable devices (PDA,
Tablet, Kindle).
Does this mean that dematerialised goods will replace their
materialised counterparts? Again, I do not think so - at least not in the near future.
While it can be predicted that dematerialised goods will gain in popularity, it will still
take many years for them to completely replace the materialised form of the same
goods. Goldstuck correctly points out that it takes some years for consumers to gain
confidence in the use of technology and applications to their full potential. 171
Dematerialised and materialised goods will co-exist for many years before a
transition from materialised to dematerialised goods will take place.
At present, electronic transactions are mostly initiated by the consumer. In other
words, the consumer decides what he requires and then purchases it online. Many
digital devices often require software updates to increase their capabilities and to
ensure that they operate smoothly. These devices are programmed to determine if
they require an update and they then prompt the user to initiate the update. Users
168
Technology at 17.
169
Technology at 17.
170
Technology at 17.
171
42
can also preset their device to run and install updates automatically whenever an
Internet connection is available. I refer to this as machine-initiated e-commerce.
As technology progresses, machine-initiated e-commerce will become more
common. When purchasing a device, the user either enters into a licencing
agreement with the manufacturer-seller that future updates will be made available
free of charge, or a pre-determined payment method is agreed upon. For example,
the users credit card details can be recorded on the device and the card is debited
whenever the device orders goods or downloads and installs dematerialised goods.
Alternatively, the user can be invoiced for every transaction for which payment must
be made. Machine-initiated e-commerce will enable vehicles to run software updates
automatically, make service appointments, and order faulty or worn parts before the
next service is due. Medical equipment similar to pace makers, can determine
certain illnesses in users, like low or high blood pressure, and order medication to be
delivered at the users home or place of business. Music playing devices like IPods,
can determine the users music interest and automatically download new releases
from artists. This does not mean that machines will take over our lives; machines do
not have brains to think a machine must still operate on pre-programmed formulas
created by man.
Nobody can predict exactly how big e-commerce will become. 172 Technological
advances, as discussed above, allow retailers to showcase their goods to the whole
world. Digital technology, especially in the music, print, and video industry, enhances
global trade even further as delivery is not hampered by customs, slow or unreliable
postal services, or local transport and import regulations. 173 Digital information is
unlimited in its scope and diversity, and we cannot imagine what forms it will take in
future. 174 However, it can safely be anticipated that e-commerce across the globe
will increase in popularity. International trade through e-commerce will inevitably be
enhanced and will become the retail shopping method of choice for many
consumers.
172
Macdonald J and Tobin BE (1998)Customer Empowerment in the Digital Economy in Tapscott D (1998)
Blueprint of the Digital Economy at 204.
173
Macdonald J and Tobin BE (1998) Customer Empowerment in the Digital Economy in Tapscott D (1998)
Blueprint of the Digital Economy at 204.
174
Technology at 46.
43
2.6 Impact of cross-border digital trade on VAT collection
Since the 2006/2007 year of assessment, VAT has accounted for 27 per cent of
South Africas tax revenues. 175 This figure showed a decline to 24,7 per cent during
the 2009/2010 year of assessment which could be attributed to the global
recession. 176 Figure 2.4 below shows the Rand value in millions of VAT collection
since the 2006/2007 year of assessment. Despite the decline during the 2009/2010
year of assessment, VAT collection shows a steady growth.
Total VAT collection

250000
200000
150000
100000
50000
0
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
Figure 2.4 177
175
National Treasury and SARS (2012) 2011 Tax Statistics at 9

http://www.treasury.gov.za/publications/tax%20statistics/2011/2011%20Tax%20Statistics.pdf [accessed on
18 September 2012].
176
18 September 2012].
177
18 September 2012].
44
Fig 2.5 178

Figure 2.5 shows the Rand value in millions of the VAT collected on imports. These
figures include the import of tangible goods that were purchased online, and the
import of intangibles that were duly reported by taxpayers in terms of the selfassessment mechanism. It should be noted that the VAT collection on domestic
supplies shows a year on year increase as can be seen in figure 2.6 below. 179 In
contrast, VAT collection on imports showed a dramatic decline during the 2009/2010
year of assessment which can be attributed to the global recession. Although VAT
collection on imports recovered during the 2010/2011 year of assessment, the figure
is still lower than the 2008/2009 figure. Whether this could be attributed to the global
recession and greater dependence on domestic products is uncertain. That said,
economists believe that it is no recovery at all, but it could be attributed to the
178

18 September 2012]; National Treasury and SARS (2013) 2012 Tax Statistics at 135
http://www.treasury.gov.za/publications/tax%20statistics/2012/2012%20Tax%20Statistics.pdf [accessed on 4
April 2013].
179
April 2013].
45
weaker Rand and the higher cost at which goods are imported. 180 It is difficult to
predict whether the 2010/2011 figure is the start of a gradual decline in VAT
collection on imports as a result of an increase in digital imports and a failure to
collect VAT on these imports. The 2011/2012 figure shows a dramatic increase
which could, instead of a recovery, be attributed to the weaker Rand and higher
costs. While the global recession has had an impact on South Africas demand for
imported products, I believe that it is possible that the increase in digital imports, and
the failure of the self-assessment mechanism to tax these imports, have also
contributed to the decline, although it might at this stage be minimal.
SARS currently has no statistics relating to digitally imported goods, primarily
because SARS has no control over these types of transaction. 181
VAT collection on domestic supplies

250000
200000
150000
100000
50000
0
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
Fig 2.6 182
180
Michaletos J (2011) The Falling VAT Collection Mystery Moneywebtax 26 October 2011
http://www.moneywebtax.co.za/moneywebtax/view/moneywebtax/en/page267?oid=62711&sn=Detail&pid=
267 [accessed on 18 September 2012].
181
Seeger D Internet Books and Goodies not so Cheap after all Sunday Times Business Times
http://www.btimes.co.za/98/1129/btmoney/money07.htm [accessed on 18 September 2012].
182
46
As a result, the impact of digital imports on the tax base cannot be accurately
determined or predicted. It is clear from my findings in paragraph 2.5.2, that ecommerce currently operates as a parallel trade to traditional trade. As consumer
confidence grows, e-commerce will gradually shift from a parallel trade to a dominant
trade. In other words, e-commerce does not create a new market; instead the current
market is shared between e-trade and traditional trade. E-commerce will gradually
take up a larger slice of the market. I therefore suggest that the current statistics and
predictions of the impact of e-commerce on the domestic market, should be applied
to calculate an estimate of the impact that e-commerce will have on the VAT
collection on imports.
The Internet economy currently contributes two per cent of GDP standing at R59
billion of which R2,636 billion is accounted for by B2C e-commerce (retail sales). 183
Retail e-commerce contributes 0,009 per cent of GDP. 184 It is trite that not all ecommerce transactions involve cross-border trade in digital products. However, the
findings in paragraph 2.4.3 above clearly indicate that South African retailers fall
short in serving the e-commerce market. Consumers, therefore, resort to
international retailers. If it is assumed that cross-border trade of digital goods follows
the same ratio to the total imports, as domestic e-commerce follows to GDP, VAT on
digital imports could amount to R1,8 million per annum. 185 This figure is rather low,
and could be even lower if the small digital download exemption in terms of section
14(5)(e) of the VAT Act 186 is considered. Nevertheless, retail e-commerce in South
Africa has shown a 30 per cent growth year on year since 2006. 187 This growth could
increase dramatically from 2014 to 2016 as consumer confidence in e-commerce
increases. 188
April 2013].
183
Goldstuck A (2012) Internet Matters: The Quiet Engine of the South African Economy at iii and 3
184
185
Calculated as the percentage of E-commerce to GDP multiplied by the total VAT revenue on imports for the
2011/2012 year of assessment.
186
VAT Act 89 of 1991.
187
http://internetmatters.co.za/report/ZA_Internet_Matters.pdf [accessed on 18 September 2012]
188
See the confidence-theory discussed in paragraph 2.4.3 above.
47
While it could be argued that VAT collection on digital imports is insignificant and
could be negated, it should be noted that the gradual growth in e-commerce will in
the long run steadily erode the tax base as VAT collection on traditional retail will
decrease. As the Internet connectivity rate increases and consumers become aware
that digitally imported products can (effectively) be purchased tax free, 189 the growth
in digital e-commerce can effectively cripple traditional retail. In the global music
industry 32 per cent of all music purchased in 2011 was delivered to the recipient in
digital form. 190 These figures will rise dramatically as electronic devices become
more readily available and consumer confidence in e-commerce grows.
2.7 Conclusion
In this chapter the history of the Internet and the events leading to the birth of ecommerce were discussed. Traditional retail shopping, materialised online shopping,
and dematerialised online shopping methods were compared. This required a
discussion on how digital technology and encoding methods operate and how they
are applied in dematerialised e-commerce.
Statistics on South Africas e-commerce trends and predicted future trends show that
e-commerce in South Africa has the potential to blossom. This e-commerce boom in
B2C transactions is anticipated to materialise between 2013 and 2016. While it is
obvious that most South African retailers will not be ready to serve the consumer emarket by 2013, international e-trade is set to benefit most from the South African ecommerce boom. This means that more goods will be imported to South Africa by
consumer end users (B2C).
With the endless possibilities of digital technology in mind, it is clear that future
technological advances will divide e-commerce into user-initiated e-commerce and
machine-initiated e-commerce. While it is already difficult to monitor and determine
189
Tax free in this sense is used as a laymans term to connote the situation where the consumer knowingly
or innocently fails to pay VAT in terms of the self-assessment mechanism.
190
Danaher B, Smith MD, Telang R, Chan S (2012) IFPI Digital Music Report
http://www.ifpi.org/content/section_resources/dmr2012.html [accessed on 18 September 2012].
48
the monetary value of dematerialised imported goods to South Africa, it will be even
more difficult to do so with machine-initiated dematerialised imports. It is trite that the
shift from traditional shopping to e-commerce will be a gradual process that could
take between five and 25 years. It is further trite that e-commerce will not replace
traditional shopping in its entirety. But, if history and the statistics are anything to go
by, e-commerce has become a major international trade tool and will become even
more so in future. With this as backdrop, it is clear that the time is now ripe for
governments and regulators to determine the threats that e-commerce poses on
various levels, and to act now to eliminate future chaos. One of these problems
posed by international dematerialised e-commerce (B2C in particular), is the
possibility of revenue losses for the fiscus because VAT on these transactions
cannot be levied and collected adequately. As these transactions can sometimes
occur completely anonymously (especially in the case of machine- initiated ecommerce), it is often difficult to trace the transaction and tax it appropriately. In
Chapter 3, the South African Value Added Tax system will be discussed with specific
reference to the ability to collect Value Added Tax on digital products imported into
South Africa by end users.
49
CHAPTER 3
SOUTH AFRICA
3.1 Introduction
In Chapter 2 the history of the Internet and digital technology were discussed.
Consumer trends in online shopping were also discussed, and emphasis was placed
on the rapid growth that online shopping, in particular online shopping for digital
products, has shown over the past decade. It was also highlighted that if these
trends are anything to go by, many traditionally corporeal goods will in future mainly
be purchased online in their incorporeal digital form.
This change in technology could ultimately lead to a change in consumer behaviour
in that traditional shopping methods will gradually give way to online shopping.
50
Moreover, this change inevitably means that an increasing number of traditionally

tangible retail products will be purchased and delivered in their intangible form from
anywhere in the world. The question arises whether modern day consumer taxes,
which were developed primarily to tax the consumption of tangible goods and
services, can be applied to tax the consumption of intangibles.
In this Chapter I examine the current South African VAT system to determine
whether it can be applied in its current form adequately to tax cross-border
transactions involving intangible goods. First, I give a brief historical outline of the
South African VAT system, before discussing the basic characteristics of a VAT
system. This is followed by the main discussion in which I critically discuss the
current VAT Act 191 and its ability to tax cross-border transactions involving both
tangible and intangible goods.
3.2 The history of VAT in South Africa
Since the 1980s, VAT has been introduced in many industrialised countries, and
since 1990 a number of developing countries have followed suit. 192 The majority of
the developing countries adopted VAT on the advice of and with assistance from the
International Monetary Fund and the World Bank. 193
On 24 November 1967, the then State President Jozua Naud appointed the
Commission of Enquiry into Fiscal and Monetary Policy in South Africa. 194 This
Commission was tasked to investigate the state of the South African tax system,
and, inter alia, to make recommendations on the implementation of a sales tax
system. 195
The Commission investigated the feasibility of a VAT system as an
indirect tax system for South Africa, but, it found that the high administrative burden
191
Act 89 of 1991.
James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 17.
193
James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 17; Ebrill L, Keen M, Bodin JP,
Summers V (2001) The Modern VAT at 5-13.
194
First Report of the Commission of Enquiry into Fiscal and Monetory Policy in South Africa at iii.
195
First Report of the Commission of Enquiry into Fiscal and Monetory Policy in South Africa at iii.
192
51
of the implementation of a VAT system, would render it unsuitable for South

Africa. 196
Based on the recommendations of the Franzsen Commission, on 1 July 1978,
General Sales Tax (GST) was introduced at a rate of four per cent 197 on a limited
range of goods and services. 198 The GST system, as it was applied in South Africa,
was a single stage collection system. 199 Accordingly, tax was levied in the last stage
of the production-distribution chain. In other words, tax was levied when goods and
services were sold to a consumer. This system was open to abuse. Retailers, in their
capacity as final consumers, were able to avoid paying GST by merely producing
proof of their business status when making purchases.
Under the GST system, business paid GST on capital goods. 200 The tax paid on
such items were costed into the final price paid by the consumer. 201 This ultimately
resulted in tax on tax. The cascading effect of GST had an increasingly negative
effect on the South African economy since 1980, and the well-known European
pattern of tax on value added based on an invoice system, 202 was an attractive
alternative by which the South African government could raise revenue. 203 On 5
February 1988, the then Minister of Finance, Barend du Plessis, announced that a
VAT system would replace the GST system in South Africa as from 30 September
1991. 204 Although many concerns were raised about the appropriateness of a VAT
system for South Africa, the legislator contended that it would effectively remove the
cascading effect of the GST system. 205 The view was expressed that the benefits of
the VAT system would be realised if the VAT base were applied as broadly as
196
First Report of the Commission of Enquiry into Fiscal and Monetory Policy in South Africa at paras 203-204.
Sales Tax Act 103 of 1978. The tax rate was subsequently increased to thirteen per cent.
198
th
Silver M and Beneke C (2013) VAT Handbook 9 ed at para 1.1.
199
th
200
th
201
th
Silver M and Beneke C (2013) VAT Handbook 9 ed at para 1.2
202
See paragraph 3.3.2 below.
203
Morris JRP, Huxham K, Haupt P (1988) Getting to know VAT- A Practical Approach at 1.
204
Huxham K and Haupt P (1991) South African VAT- The Book at A-1; Morris JRP, Huxham K, Haupt P (1988)
Getting to know VAT- A Practical Approach at 1; James A (1991) VAT Demystified at 1; Ferguson S and Rubin
RRR (1991) Handy Guide to VAT at 1; Go DS, Kearney M, Robinson S, Thierfelder K (2005) An Analysis of
South Africa's Value Added Tax World Bank Policy Research Working Paper no 3671 at 2.
205
Huxham K and Haupt P (1991) South African VAT- The Book at A-1; Go DS, Kearney M, Robinson S,
Thierfelder K (2005) An Analysis of South Africa's Value Added Tax World Bank Policy Research Working
Paper no 3671 at 2.
197
52
possible to all goods and services, and if a uniform rate was applied. 206 This
approach was in line with the recommendations of the Margo Commission. 207 As a
result, VAT was introduced at a rate of ten percent on 30 September 1991 by the
Value Added Tax Act 208 as a broad-based indirect tax on the domestic consumption
of goods and services. 209 On 7 April 1993, the tax rate was increased to fourteen
percent by section 23(1)(a) of the Taxation Laws Amendment Act. 210
3.3 The basic design of a VAT system

3.3.1 VAT: A consumption tax
Most VAT systems, including that of South Africa, are based on the principle of
consumption. 211 Consequently, the person who consumes the goods and services is
the person who ultimately carries the burden of paying the tax due on them. 212
Although the South African VAT system levies VAT on production, it is still the final
consumer who carries the burden of tax as intermediaries (wholesalers, distributors,
and retailers) receive tax credits on the VAT paid on input. 213 Despite the fact that
206
Margo Commission (1986) The Report of the Commission of Inquiry into the Tax Structure of the Republic of
South Africa at 69-70; Huxham K and Haupt P (1991) South African VAT- The Book at A-1.
207
Margo Commission (1986) The Report of the Commission of Inquiry into the Tax Structure of the Republic of
South Africa at 69-70; Huxham K and Haupt P (1991) South African VAT- The Book at A-1.
208
Act 89 of 1991.
209
Paper no 3671 at 2.
210
Act 97 of 1993.
211
Go DS, Kearney M, Robinson S, Thierfelder K (2005) An Analysis of South Africa's Value Added Tax World
Bank Policy Research Working Paper no 3671 at 2; Doussy E (2001) The Taxation of Electronic Commerce and
the Implications for Current Taxation Practices in South Africa at 89; Botes M (2011) South African VAT and
non-Resident Business International VAT Monitor vol 22 no 6 at 396; Schenk A and Oldman O (2007) Value
Added Tax: A Comparative Approach at 31-33.
212
Bird RM and Gendron PP (2007) The VAT in Developing and Transitional Countries at 71-77; Schenk A and
Oldman O (2007) Value Added Tax: A Comparative Approach at 4; Millar R (2008) Jurisdictional Reach of VAT
in Krever R (ed) (2008) VAT in Africa at 178.
213
Kearney M (2003) Restructuring Value-Added Tax in South Africa: A Computable General Equilibrium
Analysis at 24; James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 17; Go DS,
Kearney M, Robinson S, Thierfelder K (2005) An Analysis of South Africa's Value Added Tax World Bank
Policy Research Working Paper no 3671 at 2; Bird RM and Gendron PP (2007) The VAT in Developing and
Transitional Countries at 10; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 3846; Millar R (2008) Jurisdictional Reach of VAT in Krever R (ed) (2008) VAT in Africa at 179.
53
the final consumer carries the burden of paying tax, the effect of VAT is often felt by
companies whose outputs are being taxed. 214 The effective incidence of taxes (and
also VAT) is not always determined by the nature of the tax, but also by the interplay
of demand and competition between suppliers. 215
Under a VAT system, output VAT is charged on the value added at each stage in the
production-distribution chain. 216 To ensure that only the final consumption is taxed,
the tax paid on all goods and services acquired to render the supply for final
consumption, should be refunded in the hands of such purchasers as inputs. 217 In
other words, the tax rolls forward from each intermediary transaction until the final
point of consumption. This ensures tax neutrality. 218 To ensure that tax credits relate
to production and not the consumption of goods and services, certain restrictions
must be imposed on input credits. 219 For example, input credits are fully or partly
denied on motor vehicles and entertainment. 220 Motor vehicles and entertainment,
despite their application in the production stages, are mainly used as consumption
goods and not necessarily in the production of income or in the making of taxable
supplies.
If VAT is not appropriately levied and recovered at each level of the production
chain, it will no longer be a consumption tax. 221 Breaks in the tax chain can lead to
the failure to collect VAT by revenue authorities. Breaks in the tax chain can also
lead to the failure to recover VAT paid by intermediaries, which would ultimately lead
to double taxation. 222
214
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 15.
216
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 16; Huxham K and Haupt P (1991) South
African VAT- The Book at A-2; James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 17;
Bird RM and Gendron PP (2007) The VAT in Developing and Transitional Countries at 10; Schenk A and Oldman
O (2007) Value Added Tax: A Comparative Approach at 17.
217
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 16; Bird RM and Gendron PP (2007) The
VAT in Developing and Transitional Countries at 10.
218
Cnossen S (1991) Design of the Value Added Tax: Lessons from Experiences in Khalilzadeh-Shirazi Jand
Shah A (eds) (1991) Tax Policy in Developing Countries at 73.
219
220
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 16; also see section 17(2)(a) and (c) of the
VAT Act.
221
222
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 18; Cnossen S (1996) VAT Treatment of
Immovable Property in Thuronyi (ed) (1996) Tax Law Design and Drafting vol 1 at 231-232.
215
54
3.3.2 VAT: An invoice-based tax

To avoid breaks in the tax chain, a VAT system is based on an invoice system. 223
The invoice forms the basis for input and output taxes. 224 The invoice-based system
not only creates a good audit trail, but also allows for cross checking with the income
tax system. 225 For example, where an input tax deduction is sought based on an
invoice for goods or services rendered by a supplier, the suppliers financial
statements should reflect the amount received on the invoice as part of its gross
income. Under an invoice system, the amount of tax paid for goods or services can
be determined with precision. 226 In addition, each trader charges VAT on the sale of
goods or services to the purchaser and delivers an invoice to the purchaser
reflecting the VAT paid. 227 The purchaser is, in turn, able to credit the VAT as an
input against the output VAT charged on its own sales. The balance is paid to
revenue authorities, while any excess credits are refunded. 228
3.3.3 VAT: A broad-based tax
Ideally, VAT should be applied on a broad range of both goods and services. 229
Taxing one commodity and excluding another distorts consumer choice and
negatively affects revenue potential. 230 Some concessions based on policy can be
223
Huxham K and Haupt P (1991) South African VAT- The Book at A-2; Cnossen S (1991) Design of the Value
Added Tax: Lessons from Experiences in Khalilzadeh-Shirazi J and Shah A (eds) (1991) Tax Policy in Developing
Countries at 72.
224
Paper no 3671 at 7.
225
Huxham K and Haupt P (1991) South African VAT- The Book at A-2.
226
Huxham K and Haupt P (1991) South African VAT- The Book at A-2.
227
228
229
Cnossen S (1991) Design of the Value Added Tax: Lessons from Experiences in Khalilzadeh-Shirazi J and
230
55
made, for example, to redistribute wealth, or to protect domestic produce from

cheaper imports. 231
3.3.4 Destination v origin-based tax
VAT can be levied on the basis of either destination or origin. In terms of the
destination basis, VAT is levied at the level of consumption based on the location of
the consumption. 232 Put simply, VAT is levied at the domestic level. This means that
imports are taxed while exports are zero-rated. 233 Some economists are of the view
that the destination-based VAT system discourages imports and encourages
exports. 234 This argument is based on the fact that domestic goods and services can
enter the international market stripped of VAT, while imported goods are subject to
import taxes. This may be true in a transition when the VAT replaces a predecessor
tax, such as a manufacturers sales tax. On its own, however, the VAT does not
exhibit those properties. Actually, if all countries apply the destination principle, the
VAT should be close to neutral on trade.
In terms of the origin basis, VAT is levied at the consumption level based on the
origin of the goods, irrespective of where the goods are finally consumed. 235 This
means that imports are not taxed while exports are taxed. This system could be seen
231
Shah A (eds) (1991) Tax Policy in Developing Countries at 78; Go DS, Kearney M, Robinson S, Thierfelder K
(2005) An Analysis of South Africa's Value Added Tax World Bank Policy Research Working Paper no 3671 at
6-7.
232
Metcalfe GE (1995) Value Added Taxation: A Tax Whose Time has Come? The Journal of Economic
Perspectives vol 9 no 1 at 130; OECD (2011) International VAT/GST Guidelines on Neutrality at 4
http://www.oecd.org/tax/consumptiontax/48331948.pdf [accessed on 18 March 2013]; Grandcolas C (2007)
VAT on the Cross-Border Trade in Services and Intangibles Asia-Pacific Tax Bulletin vol 13 no 1 at 39; Schenk
A and Oldman O (2007) Value Added Tax: A Comparative Approach at 20-21; Millar R (2008) Jurisdictional
Reach of VAT in Krever R (ed) (2008) VAT in Africa at 176-177.
233
OECD (2011) International VAT/GST Guidelines on Neutrality at 4
http://www.oecd.org/tax/consumptiontax/48331948.pdf [accessed on 18 March 2013].
234
Perspectives vol 9 no 1 at 130.
235
56
to encourage imports as imported goods from low VAT jurisdictions, are placed at an
advantage over domestic goods in jurisdictions with a high VAT rate. 236
Since VAT is primarily characterised as an indirect tax on consumption, the
destination-based system can be classified as an out and out VAT system. The
destination base ensures greater tax neutrality in cross-border transactions. 237 This
can be attributed to the fact that imported goods are taxed on par with domestic
goods and services. 238 In the case of the origin base, imported goods are taxed in
the country of origin. These goods often compete with domestic goods, especially
where the foreign VAT rate is lower than the domestic rate. 239 Tax neutrality is not
achieved and market distortions occur frequently.
Under the destination base, imports are fully taxed either at the border, or in terms of
the deferred payment or postponed accounting method commonly referred to as a
reverse-charge mechanism. 240 Here imports are taxed at the time of the importers
next periodic VAT return. 241 This allows for the tax free movement of goods and
services across borders and international trade is not distorted. 242
However desirable in theory, problems in applying and administering the destination
principle inevitably occur. 243 The destination principle is primarily designed to tax
domestic consumption and where international trade is heavily regulated. Advances
in transportation, communication, and technology have, in recent decades had an
important impact on the way businesses and consumers do business. Cross-border
trade is no longer restricted to an elite group of import and export companies. Many
consumers can now engage in international trade without the assistance of import
and export agents. In Chapter 2 it was shown how the Internet has changed
236
237
Shah A (eds) (1991) Tax Policy in Developing Countries at 73; OECD (2011) International VAT/GST Guidelines on
Neutrality at 5 http://www.oecd.org/tax/consumptiontax/48331948.pdf [accessed on 18 March 2013].
238
239
Where the foreign VAT rate is higher than the domestic VAT rate, there is, of course, no such competition.
240
241
242
243
57
consumer behaviour. Technological advances now allow consumers to trade on an

international level without leaving the comfort of their homes. These transactions
often go undetected and unregulated.
3.4 The rise of e-commerce and the South African VAT system
The tax implications of the Internet and e-commerce have not been felt in many
countries outside Asia, the USA, and Europe. 244 This can be attributed to slow or
virtually no Internet connections, and/or a lack of confidence among consumers. In
Chapter 2, it was indicated that e-commerce will become more popular in developing
countries as consumer confidence grows. Technological advances will make ecommerce an inevitable part of daily life. Although the future of technology cannot be
predicted with absolute certainty, some key issues relating to VAT and the Internet
are fairly certain. 245
During 1997, the Katz Commission received evidence that international trade will
increasingly be influenced by technological advances. 246 The Commission stated:
There is no doubt that these developments will greatly impact some of the basic tenets
of international taxation as they exist today. Examples include the irrelevance of
physical presence in order to trade (impacting on "permanent establishment" concepts),
the ease with which current residence notions can be manipulated through hypermobility of an entire office and trading or management capacity, and the manner in
which goods or services can be contracted for, advertised and even delivered via
electronic means.
247
Clearly, the South African VAT system will be affected by e-commerce, technological
advances, and changes in online consumer patterns. The Katz Commission correctly
stated that it would be premature to suggest changes to existing VAT rules before
244
246
Katz Commission (1997) Fifth Interim Report of the Commission of Inquiry into Certain Aspects of The Tax
Structure of South Africa at par 7.4.1.
247
245
58
the exact impact of these influences can be determined. 248 Politicians are often of
the view that e-commerce is a phenomenon of the current age, and bears no real
risk for the fiscus. In the main, a wait and see policy is adopted with grave results. In
Chapter 2 the fast rate at which e-commerce is gaining in popularity among
consumers, was highlighted. If these consumer trends are anything to go by, the
time is now ripe to determine the effect of these online consumer trends on the ability
of SARS to collect VAT on the these transactions within the ambit of existing VAT
legislation. Concerns that the Internet may have the effect of shrinking the tax base
are legitimate. 249 In the absence of any definitive rulings or policy statements from
SARS, we can assume that existing VAT principles will apply to e-commerce
transactions in South Africa. 250 The following should be considered to determine the
VAT treatment of online cross-border transactions:
From the outset, it should be noted that these issues should be addressed in no
particular order. Some of the issues will overlap. While I have attempted to keep
these issues separate, some overlapping and repetition could not be avoided.
3.4.1 Is there a supply of goods or services?
248
249
Green Paper on Electronic Commerce for South Africa (2004)
http://www.westerncape.gov.za/Text/2004/6/green_paper_on_electronic_commerce.pdf [accessed on 18
March 2013]; also see paragraph 2.6 above.
250
Bagraim P (2003) Another Taxing Task Jutas Business Law vol 9 part 3 at 109.
59
Subject to exemptions, exceptions, deductions, and adjustments provided for in the

VAT Act 251, VAT shall be levied:
(a) on the supply by any vendor of goods or services supplied by him on or after
the commencement date in the course or furtherance of any enterprise carried
on by him;
(b) on the importation of any goods into the Republic by any person on or after
the commencement date; and
(c) on the supply of any imported services by any person on or after the
commencement date,
calculated at the rate of 14 per cent on the value of the supply concerned or the
importation, as the case may be.
252
For purposes of VAT, it is important to distinguish between the supply of goods and
of services as the two are treated differently. 253 In addition, the place of supply and
VAT collection mechanisms differ depending on whether one is dealing with goods
or services. It is difficult, if not impossible, correctly to classify electronically supplied
goods (incorporeal goods) because VAT legislation was designed to cater for
tangible goods and predominantly physically rendered services in an era before ecommerce.
The VAT Act 254 defines goods as:
Corporeal movable things, fixed property, any real right in any such thing or fixed property,
and electricity, but excluding(a) money;
(b) any right under a mortgage bond or pledge or of any such thing or fixed property; and
(c) any stamp, form or card which has a money value and has been sold or issued by the
State for the payment of any tax or duty levied under any Act of Parliament, except
when subsequent to its original sale or issue it is disposed of or imported as a
collectors piece or investment article.
255
251
Act 89 of 1991.
Section 7(1) of the VAT Act 89 of 1991.
253
See section 13 of the VAT Act that deals with the importation of goods, and section 14 that deals with the
importation of services.
254
Act 89 of 1991.
255
Section 1 of the VAT Act 89 of 1991.
252
60
A distinction must be drawn between commodities that are ordered and delivered on
the Internet by electronic means, and commodities that are ordered on the Internet
and delivered by traditional means. 256 In the latter case, administrative procedures
already in place for traditional cross-border trade continue to apply. 257 A sound
invoicing system is, therefore, of cardinal importance.
The supply of tangible goods ordered over the Internet is fairly easy to monitor
because tangible corporeal goods must be cleared through customs at a border post
before entering the country. 258 Goods delivered by airmail are monitored by the
central international post offices at OR Tambo International Airport, Durmail in
eThekwini, and Capemail in Cape Town, where the value for VAT purposes is
determined, and where VAT is levied at the appropriate rate. 259 These goods,
accompanied by a VAT declaration, are posted to the recipient. The recipient must
pay VAT (as indicated on the VAT declaration form) at the post office where the
package is collected. The fact that tangible goods, which are ordered electronically,
are delivered to a designated physical address simplifies the task of ensuring that
appropriate VAT is levied and collected. 260
In the case of Internet deliveries of incorporeal goods such as software, music, and
videos, two issues arise. In the first instance, it is often difficult to determine whether
or not a transaction has occurred. 261 As delivery cannot be intercepted as in the case
of corporeal goods that must enter a customs area, it is difficult to track and trace the
occurrence of these transactions. 262
256
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 186; OECD (2011) International VAT/GST
Guidelines on Neutrality at 5 http://www.oecd.org/tax/consumptiontax/48331948.pdf [accessed on 18 March
2013].
258
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 233; Van der
Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 382, Classen L (2012) E-commerce and
Value Added Tax in Papadopoulos S and Snail S (eds) (2012) Cyberlaw@SAIII at 113; Naicker K (2010) The
VAT Implications of E-commerce Taxtalk January/February 2010 at 8.
259
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 233.
260
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 234; Naicker K
(2010) The VAT Implications of E-commerce Taxtalk January/February 2010 at 8.
261
262
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 186; OECD (2011) International VAT/GST
Guidelines on Neutrality at 5 http://www.oecd.org/tax/consumptiontax/48331948.pdf [accessed on 18 March
2013].
257
61
Secondly, the classification of digitised products as either goods or services can be

problematic. Electronically delivered goods or digitised products are incorporeal
movable goods, and their provision would not qualify as the supply of goods for
purposes of section 7(1)(a). Similarly, where digitised products are imported by the
taxpayer, this would not qualify as the importation of goods in terms of section
7(1)(b).
Services are defined to mean:
Anything done or to be done, including the granting, assignment, cession or surrender
of any right or the making available of any facility or advantage, but excluding a supply
of goods, money or any stamp, form or card contemplated in paragraph (c) of the
definition of goods
263
The definition of services is particularly wide so as to include any form of intangible

thing, service, or right. Electronically delivered products should, in principle, qualify
as the supply of services. It is, however, not certain whether the payment for digitally
downloaded products constitutes payment for the use of, or for the right to use
copyright, or payment for the purchase of goods or services. 264 In the Green Paper
on Electronic Commerce for South Africa the question is posed whether the amounts
paid for digital products should be classified as royalties or as the purchase price for
intangible products. 265
3.4.1.1 Payment for the use of, or the right to use, intellectual property
In the case of electronically ordered, physically delivered goods (for example,

music), the purchaser makes payment in exchange for a tangible thing (CD, tape, or
vinyl). Generally, the purchaser receives ownership of the tangible item but,
depending on the express or tacit agreement between the seller and the purchaser,
the rights to the music stored on the tangible item are limited. Generally, music sold
263

265
March 2013].
264
62
as such, is subject to conditions reserving the rights of the producers or owners of

the work. In addition, the copying of the music, hiring out thereof, and the recording
thereof are prohibited. Subject to these restrictions, the purchaser may do with the
tangible item as he wishes, including disposing of it or destroying it. It could therefore
be argued that the purchase price paid for the music consists of payment for the
tangible item (CD, tape, or vinyl) and the right to use the intellectual property (music)
stored on the tangible item. That said, in the absence of an agreement to this effect,
the sale of the music stored on disc is generally treated as the sale of goods for VAT
purposes.
In the case of electronically ordered and delivered goods (for example, digital music
ordered and delivered through a network), no tangible goods can be identified. It can
be argued that the purchase price paid constitutes payment for the right to use the
intellectual property (music) that was electronically delivered because there is no
tangible storage device or object.
However, the VAT treatment of intellectual property is no different from that of any
other service. The definition of services clearly includes the granting, assignment,
cession or surrender of any right.... The granting of a right to use intellectual
property constitutes services as defined.
It is, however, not as uncomplicated as it at first glance appears, as can be seen
from the examples below:
Example 3.1: X purchases music from Y online. Y delivers the music to X
electronically. Y is the owner of and rights holder in the music. The
transaction is subject to the condition that all rights in the music are
reserved. The purchase price, therefore, constitutes the right to use the
intellectual property (the music).
Example 3.2: Y owns a database of electronically stored music. Y has
developed software that allows him to sell the music stored in his database
to online consumers. X purchases the database and software from Y. The
software and music database are delivered to X electronically. Ownership
63
in the database and software is assigned to X. X uses the database and

software to sell and distribute music.
In example 3.1 the right to use the intellectual property constitutes the rendering of a
service as defined.
In example 3.2 the rights assigned to X amount to the sale of a business or
enterprise, and might comply with the requirements for the sale of a going concern
and qualify for zero rating. 266 In this case, although intangibles were sold, this cannot
constitute the rendering of a service as defined.
Each transaction should therefore be treated individually to determine the type/form
of supply. This would, however, place a tremendous administrative burden on tax
authorities and suppliers.
3.4.1.2 Electronic products equal to services?
To date, SARS has issued no ruling, Interpretation Note, or policy document

reflecting its views on the treatment of electronically delivered intangible products. In
the Green Paper on Electronic Commerce for South Africa, emphasis was placed on
the fact that tax systems should be characterised by certainty and simplicity. 267 Yet,
it was further recommended in the Green Paper that South Africas tax system
should be protected so as not to erode the tax base by international decisions
266
In terms of section 11(1)(e) of the VAT Act 89 of 199, the supply by a registered vendor of an enterprise or
part of an enterprise that is capable of separate operation where the supplier and the recipient have agreed in
writing that the enterprise will be disposed of as a going concern will be subject to VAT at zero percent
provided that:
i) Both the seller and purchaser are registered VAT vendors;
ii) The parties agreed that the enterprise will be an income-earning activity on the date of transfer;
iii) The assets necessary for the carrying on of such enterprise is transferred to the seller;
iv) The parties have agreed in writing the transaction is subject to VAT at zero percent.
Also see Interpretation Note 57; Huxham and Haupt (2013) Notes on South African Income Tax at 958-959;
Stiglingh M (ed), Koekemoer AD, Van Schalkwyk L, Wilcocks JS, De Swardt RD (2013) Silke: South African
Income Tax 1030-1031.
267
March 2013].
64
favouring sophisticated and developed nations. 268 Despite the fact that the Green
Paper favours the OECD proposal that electronically delivered products should be
treated as services, it is also advised that:
The blanket characterisation of all on-line deliveries as supplies of services, even where
a similar product can be delivered physically at a zero or reduced rate, does not appear
to be fair. Unless rates and other differences in treatment are equalised, this will result
in the heavier consumption taxation of many electronic commerce transactions.
This hedged approach is not a phenomenon restricted to South Africa. Tax

uncertainties can negatively affect cross-border trade. Steyn suggests that a general
and internationally acceptable approach to the characterisation of digital products
should be developed. 269 In the light of the fact that jurisdictions place the protection
of their own tax base above harmonisation of world tax laws, a general
internationally acceptable approach might not be feasible. Furthermore, the lack of
clear classification rules adds to the confusion in practice. In a study compiled by De
Swardt and Oberholzer, it was found that seventeen percent of respondents thought
that digitised products were classified as goods, while eight percent were of the
view that they could be classified as both goods and services. 270 This study
confirms that the hedged approach is not really feasible.
The demand for digitised products will increase whether or not SARS can deal with
electronic transactions adequately. Bagraim is of the opinion that SARS will follow
the OECD recommendation that digital products should be treated as services,
despite the Green Papers hedged recommendations. 271 In any event, it is clear
from the definition of goods, that digitised products do not qualify as goods. 272 To
classify digitised products as goods would require an amendment to the definition.
Van der Merwe opines that the archetypal VAT is a tax on consumption, irrespective
268

March 2013].
269
Steyn T (2010) VAT and E-commerce: Still Looking for Answers?SA Merc LJ vol 22 no 2 at 237.
270
De Swardt RD and Oberholzer R (2006) Digitised Products: How Compliant is South African Value Added
Tax? Meditari Accountancy Research vol 14 no 1 at 19.
271
272
Johnston G and Pienaar S (2013) Value-Added Tax on Virtual World Transactions: A South African
Perspective International Business and Economic Research Journal vol 12 no 1 at 73
http://www.cluteinstitute.com [accessed 12 April 2013].
65
of whether the consumption amounts to the consumption of goods or of services. 273

The fact that traditional tangible goods can be converted to intangible goods, does
not change the nature of the goods; it is merely the way in which the goods are
delivered that is altered. 274 Van der Merwe correctly asks whether it is at all
necessary to distinguish between goods and services in jurisdictions where there is
no differentiation between the rate at which goods and services are taxed. 275
Different VAT rates often dictate the taxpayers choice of product. 276 For example,
where services are taxed at a lower rate than goods, the taxpayer would likely order
music delivered electronically as opposed to a thing that is delivered physically.
Historically, different rates have been applied to the supply of goods and of services
because of legal or technical constraints that prevented international trade, or
rendered
international
trade
uneconomical. 277
The
historical
reasons
for
differentiation are fading, and the spread of e-commerce demands that the
differentiation should be reconsidered. 278 Since goods and services are taxed at the
same rate in South Africa, the historical differentiation serves no purpose. That said,
the importation of goods is treated differently from the importation of services. 279
The importation of goods by any 280 person is subject to VAT. 281 The nature of the
goods, the use to which they are put, and the importers VAT registration status, are
irrelevant. The importation of services in terms of section 7(1)(c) is subject to the
definition of imported services.
Imported services mean:
A supply of services that is made by a supplier who is a resident or carries on business
outside the Republic to a recipient who is a resident of the Republic to the extent that
273
De Wet C and du Plessis R (2004) Taxation (VAT) in Buys R (ed) (2004) CyberLaw@SAII at 279; Van der
Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 381.
275
276
277
Fitzgerald G (1999) The GST and Electronic Commerce in Australia Murdoch University Electronic Journal
of Law vol 6 no 3 at 6 http://www.austlii.edu.au/au/journals/MurUEJL/1999/32.html [accessed on 18 March
2013].
278
279
See paragraph 3.4.4.1 below.
280
My emphasis.
281
Section 7(1)(b) of the VAT Act 89 of 1991.
274
66
such services are utilized or consumed in the Republic otherwise than for the purpose
of making taxable supplies.
282
This means that where services are imported for purposes of making taxable
supplies (in other words, not for final consumption), no VAT is payable. The
differentiation can best be illustrated by way of examples:
Example 3.3: X imports music CDs to be sold in retail outlets across the
Republic. X must account for output VAT on the value of the CDs when
they are imported into the Republic. The output VAT paid by X upon
importation, may be claimed as input VAT against Xs output VAT liability
when the CDs are sold in the retail outlets.
Example 3.4: X imports music in digital format which X will either burn
onto CDs and sell in retail outlets, or distribute to customers through Xs
online retail portal. As the imported music is intangible, it should be treated
as services for VAT purposes. X will therefore not account for output VAT
on the importation of the music because it is imported for the purposes of
producing taxable supplies. X will account for output VAT on the music
when it is sold at retail level.
As the definition of services is wide enough to include all forms of intangibles, no
immediate amendment is required to provide for the supply of digitised products. I
therefore recommend that, while a differentiation between goods and services is
required, digitised products should, as a general rule, be treated as services as
defined. Although SARS has issued no official statement on the treatment of
digitised products, it can generally be accepted that it will treat digitised products as
services. 283 Therefore, for purposes of this thesis, digitised products will be
deemed to be services as defined.
282

See example 31 on Imported Services in VAT 404: Value Added Tax for Vendors (2010)
http://www.sars.gov.za/home.asp?pid=4&cx=009878640050894574201%3Akubtv50zym&cof=FORID%3A10%3BNB%3A1&ie=UTF-8&q=vat+decision+416 [accessed 18 March 2013].
283
67
3.4.2 Where is the supply made?
The VAT Act 284 does not provide for specific place-of-supply rules. 285 Where these
rules have been incorporated in the Act, this has been couched in vague general
terms not designed to meet the requirements of an electronic era. 286 The definition of
enterprise, and the provisions in section 7(1), should be read in conjunction to
determine the place of supply. 287
Enterprise is defined to connote:
In the case of any vendor, any enterprise or activity which is carried on continuously or
regularly by any person in the Republic or partly in the Republic and in the course or
furtherance of which goods or services are supplied to any other person for
consideration, whether or not for profit, including any enterprise or activity carried on in
the form of a commercial, financial, industrial, mining, farming, fishing, municipal or
professional concern or any other concern of a continuing nature or in the form of an
association or club;
288
In principle, the location of the suppliers enterprise determines the location where
the transaction is required to be taxed. 289 That said, cognisance should be taken of
the proviso in the definition of enterprise in relation to a foreign branch of an
enterprise situated in South Africa. A branch of the main enterprise which is situated
outside the Republic and which:
i)
can be identified as a separate entity from the main enterprise in the Republic;
and
ii) has an independent system of accounting
284
Act 89 of 1991.
Compare the detailed place-of-supply rules published by the Canada Revenue Agency, available at
http://www.cra-arc.gc.ca/placeofsupply/
286
De Wet C and Du Plessis R (2004) Taxation (VAT) in Buys R (ed) (2004) CyberLaw@SAII at 279; Botes M
(2011) South African VAT and non-Resident Business International VAT Monitor vol 22 no 6 at 396; Johnston
G and Pienaar S (2013) Value-Added Tax on Virtual World Transactions: A South African Perspective
International Business and Economic Research Journal vol 12 no 1 at 71 http://www.cluteinstitute.com
[accessed 12 April 2013].
287
288
289
285
68
shall be deemed to be an enterprise separate and distinct from the main enterprise
located in the Republic. In other words, supplies by a foreign branch of the main
enterprise, which does not operate separately from the main branch, will be deemed
to be supplies made by the main branch, irrespective of whether or not the supplies
were made in a foreign jurisdiction. This provision contradicts the destination
principle in terms of which exports are not subject to VAT, while imports are. As a
result of the absence of clear and direct place-of-supply rules in the VAT Act, 290 the
VAT treatment of different types of transaction should be examined to establish
logical place-of-supply rules applicable to each of these types of transaction.
3.4.2.1 Place of supply: Exported goods
Section 11(1), read with the definition of exported in section 1, provides for the zero
rating of goods exported to a country outside of the Republic. This provision
emphasises the application of the destination principle. Van der Merwe states that
neither section 11(1), nor the definition of exported, provides a clear indication of
where the supply is deemed to take place. 291 It goes without saying that the zero
rating provision underpins the destination principle on the supposition that the goods
will be taxed in the country to which they are exported. However, is it at all necessary
to determine the place where the goods will be supplied in the case of goods
exported from jurisdictions that follow the destination principle? Certainly, the country
to which the goods are exported will apply its own place-of-supply rules to tax the
imports. However, the movement of goods across South African borders, especially
to neighbouring countries, is not always properly controlled. 292 Documents are
falsified, and goods intended for export are often supplied locally instead of being
exported. 293 It has been suggested that exported goods should be taxable at the
standard rate, and that the exporter vendor should apply for a VAT refund upon
submitting proof that the goods have actually been exported to a destination outside
290
Act 89 of 1991.
292
Silver M and Beneke C (2012) VAT Handbook 8th edition at 75.
293
291
69
of the Republic. 294 This suggestion could further exacerbate confusion as to the
place of supply of exported goods. The goods will effectively be taxed in South
Africa, giving the impression that the goods were supplied and taxed at the suppliers
location in terms of the origin principle. As soon as the supplier applies for a VAT
refund, the place of supply - or so it could be argued - shifts to the country of
destination. The lack of clear place-of-supply rules in the case of exported goods
creates tax uncertainty which could negatively affect cross-border trade.
3.4.2.2 Place of supply: Exported services
Services that are physically rendered outside of the Republic are zero-rated. 295
Services supplied to a person who is not a resident of the Republic while he is not
physically present in the Republic, are also zero-rated. 296 It can, therefore, be
deduced that where services are exported, to the extent that they are physically
rendered outside of the Republic, the place of supply shall be the place where such
services are physically rendered. Again, no clear place-of-supply rules exist, nor are
there any clear provisions on where the place of supply is deemed to be. The place
of supply is determined on the basis of assumption and interpretation, which
interpretation, as explained below, often differs among taxpayers, academics, the
courts, and tax authorities.
Dendy opines that on a strict interpretation of section 11(2)(k), the services
themselves must be physically performed outside of the Republic to qualify for a zero
rating. 297 In other words, the South African VAT vendor must be physically present
outside of the Republic when the services are performed. It is not sufficient for the
recipient alone to receive the services outside the Republic to shift the place of
supply from South Africa to the place where the services are physically rendered.
Therefore, should a South African VAT vendor deliver digital supplies (by delivering
294

section 11(2)(k) of the VAT Act 89 of 1991.
296
Section 11(2)(l) of the VAT Act 89 of 1991; Master Currency (Pty) Ltd v CSARS (155/2012) [2013] ZASCA 17
(20 March 2013) at paras 12-19.
297
Dendy M (2012) The VAT Treatment of Imported Services at 12.
295
70
the supplies either electronically or remotely by accessing a computer) to a person

physically located outside of the Republic, the place of supply should be the place
where the supplier is physically located when the supplies are delivered, i.e. South
Africa. Should the digital supplies be rendered physically outside of the Republic by
inserting a CDROM or other storage device into the recipients device and copying
the digital products onto that device in a foreign location, the place of supply shall be
the place where the services are physically rendered at the location outside of the
Republic.
Should the services be rendered to a person who is not a resident of South Africa
and who is not physically present in South Africa when the services are rendered
(whether physically or virtually), the services shall be subject to zero rating in terms
of section 11(2)(l). 298 In other words, the place of supply shall be at a foreign
location.
Dendy argues that the strict interpretation of section 11(2)(k) and the subsequent
irrational application, were never intended by the legislator. 299 He further argues that
physically rendered was not intended to mean that the supplier must be physically
present in a foreign location where the services are being rendered, but that all that
is required is that the service itself must be physically rendered outside of the
Republic. 300 Again, it should be noted that, when it was drafted, the VAT Act 301 was
not designed to provide for modern day e-commerce and the digital supply of
products. Dendys argument to include the supply of products delivered electronically
within the meaning of physically rendered, should be seen as an attempt to extend
the meaning and application of section 11(2)(k) to cases for which it was not
designed. Nevertheless, the wording of section 11(2)(k) does not specifically dictate
that the supplier himself must physically render the services outside of the Republic.
So, where an agent or any other person or entity acting on behalf of the supplier,
physically renders such services outside of the Republic, the zero rating should, in
principle, apply.
298
Master Currency (Pty) Ltd v CSARS (155/2012) [2013] ZASCA 17 (20 March 2013) at para 17.
300
301
Act 89 of 1991.
299
71
However, the word physically entails that some form of presence outside the
Republic is required for section 11(2)(k) to come into play. Therefore, where the
services are rendered by electronic means from a remote server located in or
outside of South Africa, section 11(2)(k) cannot apply as neither the supplier nor its
agent or representative, is physically present at the location outside of the Republic.
Based on this interpretation, where digital products are delivered electronically at a
foreign destination, the place of supply is the place where the supplier is located or
established. This interpretation puts South African suppliers of digital products at a
disadvantage to foreign suppliers whose supplies are excluded from national taxes
before they enter the international market.
In Master Currency (Pty) Ltd v CSARS, 302 the court ruled that services supplied in a
tax-free zone at the then Johannesburg International Airport, cannot be zero-rated in
terms of section 11(2)(l) because the services are not physically rendered at a
location outside of the Republic, nor were the services exported as defined. 303
Cognisance should also be taken of the provisions relating to the export of
intellectual property rights. Section 11(2)(m) provides for the zero rating of services
in respect of intellectual property in so far as the intellectual property is used or
applied outside of the Republic. These services include the filing, prosecution,
granting, maintenance, transfer, assignment, licensing, enforcement or the incidental
supply of intellectual property. 304 For purposes of section 11(2)(m), intellectual
property includes patents, designs, trademarks, copyrights, know-how, confidential
information, trade secrets, or similar rights. It could be argued that digital supplies,
generally, constitute the granting, assignment or licensing of rights to intellectual
property. On this basis, the supply of digital products by a South African vendor to
any other person, should, to the extent that the digital products will be used and
applied outside South Africa, be zero-rated. In other words, the place of supply will
be the location outside of the Republic, where the intellectual property is used and
applied. That said, as it is presumed that digital supplies are deemed to be services,
the provision in section 11(2)(m) cannot apply unless the agreement specifically
302
Master Currency (Pty) Ltd v CSARS (155/2012) [2013] ZASCA 17 (20 March 2013).
Master Currency (Pty) Ltd v CSARS (155/2012) [2013] ZASCA 17 (20 March 2013) at paras 17 and 19.
304
Section 11(2)(m) of the VAT Act 89 of 1991.
303
72
provides that the intellectual property rights are being sold, transferred, granted, or
assigned, as opposed to the mere electronic delivery of digital products.
As with the provisions in section 11(1) in respect of exported goods, section 11(2)
provides no clarity on the place of supply of exported services. 305 The onus is on the
vendor to substantiate that the services have been exported, and that a zero rate
should apply. 306 To this end, the vendor must obtain and retain documentary proof
acceptable to the Commissioner substantiating the zero rating. 307 As a result of the
anonymity of e-commerce, it is often difficult to determine if the services rendered
were exported. The e-mail address or place of residence supplied by the consumer
is not an indication of the actual place of consumption. Unless vendors have
sophisticated software that identifies the consumers location by tracing the IP
address of the electronic device that is being used to purchase the digitised
products, vendors will not be aware (or have any control over) whether the digitised
products were actually exported. Many consumers could falsify the billing address or
place of residence to qualify for zero-rated supplies, while the consumer downloads
and uses the digitised products from a location within the Republic. Similarly,
residents temporarily abroad can purchase digitised products from a foreign IP
location with a false foreign address, and store these digitised products on a portable
computer or other portable storage device. These products can enter the country
undetected and untaxed. I do not foresee SARS officials scanning and recording the
contents of the storage devices of every resident exiting and entering the country.
3.4.2.3 Place of supply: Imported goods
Generally, it is fairly uncomplicated to determine the place of supply where physical

goods are consumed and where they should be taxed. This is usually the place
305
Van der Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 374; De Wet C and du Plessis R
(2004) Taxation (VAT) in Buys R (ed) (2004) CyberLaw@SAII at 281.
306
307
Section 11(3) of the VAT Act 89 of 1991. See also Van der Merwe B (2003) VAT and E-commerce SA Merc
LJ vol 15 no 3 at 377; De Wet C and du Plessis R (2004) Taxation (VAT) in Buys R (ed) (2004) CyberLaw@SAII
at 281.
73
where the goods are delivered or made available to the customer. 308 VAT must be
levied on imported goods as soon as they enter the country for customs and excise
purposes. 309 It can therefore be argued that the place of supply is the customs area
where the goods first entered the country. Conversely, where they are imported into
South Africa for domestic consumption, the place of supply will be South Africa.
3.4.2.4 Place of supply: Imported services
When section 7(1)(c) is read in conjunction with the definition of imported services
in section 1, it becomes clear that the VAT Act 310 provides for two types of
agreement, namely:i)
Transactions in which services are supplied by a foreign non-resident vendor

to a South African resident vendor. These transactions are commonly referred
to as Business-to-Business or B2B transactions.
ii) Transactions where services are supplied by a foreign non-resident vendor to

a South African resident non-vendor. These transactions are commonly
referred to as Business-to-Consumer or B2C transactions.
3.4.2.4.1 Business-to-Business transactions
In terms of the definition of imported services, no VAT will be levied on the supply
of services by a non-resident vendor to a resident vendor in so far as the services
are to be utilised and consumed in the making of taxable supplies. Where the
resident vendor sells the services so acquired to final consumers, VAT will be levied
on the supplies in terms of section 7(1)(a). Similarly, where the services so acquired
are applied in the making of any other taxable supply, the supply will be subject to
VAT in terms of section 7(1)(a). VAT is, therefore, deferred to the time and place
when the vendor makes taxable supplies.
308
OECD (2001) Consumption Tax Aspects of Electronic Commerce at 10

309
310
Act 89 of 1991.
74
It could be argued that determining the place of supply is irrelevant in these

transactions in so far as the imported services are applied and utilised in the course
and furtherance of an enterprise, and in the making of taxable supplies. The place of
supply is determined when the recipient vendor of imported services makes
subsequent taxable supplies. Generally, in the case of domestic supplies, the place
of supply is determined by the place where the supplier is established or has its fixed
place of business. 311 However, the place of supply must still be established to
determine whether the imported services were utilised and consumed in the course
and furtherance of an enterprise, and in the making of taxable supplies in the
Republic.
In CSARS v De Beers Consolidated Mines Ltd, 312 the taxpayer was approached by a
consortium which proposed a very complex transaction in terms of which the
consortium would become the holding company of De Beers. In considering the
proposal, De Beers sought financial and legal advice from NM Rothschild and Sons
Ltd, a company based in London. At the same time, De Beers also appointed a set
of South African advisors to finalise the agreement. On 7 June 2001 NM Rothschild
issued an invoice to De Beers in the amount of USA $19 895 965. Between March
2001 and January 2002 the local suppliers issued invoices to De Beers reflecting
VAT on the services rendered. De Beers treated the VAT payments as input VAT in
making taxable supplies. In an assessment issued on 18 October 2004, the
Commissioner determined that NM Rothschilds services amounted to imported
services as contemplated in section 7(1)(c), and that they were, accordingly, subject
to VAT at fourteen percent. In addition, the Commissioner denied an input VAT
deduction on the locally supplied services on the basis that they were not applied in
the furtherance of De Beers enterprise. On appeal to the Tax Court, Davis J ruled
that the services obtained from NM Rothschild were not imported services as
defined since De Beers was legally obliged, as a JSE listed company, to obtain legal
and financial advice when it was confronted with the complex business proposal. 313
In the light of this legal obligation, the services were obtained in the conducting of a
311
Section 7(1)(a) of the VAT Act 89 of 1991.

CSARS v De Beers Consolidated Mines Ltd (503/2011) [2012] ZASCA 103 (1 June 2012).
313
CSARS v De Beers Consolidated Mines Ltd (503/2011) [2012] ZASCA 103 (1 June 2012) at para [6].
312
75
continuing enterprise and should not be subject to VAT. 314 Put simply, the
transaction should be treated as a B2B transaction.
On appeal to the Supreme Court of Appeal, the court, inter alia, examined two
important issues, namely: i) the place of supply in respect of the international
services; and ii) whether NM Rothschilds services amounted to imported
services. 315
i) The place of supply in respect of international services
De Beers contended that the services acquired from NM Rothschild were consumed
outside of South Africa and could, accordingly, not be classified as imported
services. 316 It contended that the meetings with NM Rothschild took place outside of
South Africa, hence the place of supply was outside of South Africa. 317 The court
applied a practical test to determine the place of supply. On the facts it was held that
only two of the five substantial meetings were held outside of South Africa. 318 The
board of directors held meetings in Johannesburg where the advice obtained was
considered and where the decisions were made on the strength of the
recommendations. 319 The fact that some of the meetings were held outside of the
Republic cannot justify the conclusion that the services were consumed outside of
South Africa. 320
Silver and Beneke are of the opinion that the phrase utilised or consumed in the
Republic is not clear. 321 The issue arises whether services are utilised or consumed
at the place where they are physically rendered or where the recipient conducts its
business. 322 In certain cases services are, by their very nature, consumed or utilised
where they are physically rendered. 323 For example, a South African gardener
displays his exhibition at an international garden show in London and acquires the
314
See paragraph 3.4.6 below.
316
317
318
319
320
Vermaak A (2012) VAT on Corporate Advice Legalbrief 28 August 2012
http://www.legalbrief.co.za/article.php?story=20120228082656737 [accessed on 31 August 2012].
321
322
323
315
76
services of a carpenter to build the display. While the services are indeed beneficial
to the South African gardener, it can be argued that they were utilised and consumed
where they were physically rendered. Hull and Gibson state that services that were
physically rendered outside of the Republic, are not subject to VAT in South Africa
irrespective of where they are consumed or where the taxpayer benefits from
them. 324
In the case of intangible services such as repairs to computer software, or financial
or legal advice, the place of consumption is not necessarily the place of physical
delivery. It could be argued that the place where the result of the services is
experienced, or where the benefit is felt, is the place of consumption. Where benefits
from the services can be experienced in multiple jurisdictions, they will be subject to
VAT in South Africa to the extent that [they were] utilised or consumed in the
Republic. In CSARS v De Beers Consolidated Mines Ltd, 325 the court was in the
fortunate position of being able to determine the place where the meetings took
place, and at which meetings decisions based on the internationally acquired
recommendations were taken. Not all cases allow for a practical test to be applied as
can be illustrated by the following example:
Example 3.5: While X is touring in France, he attends a seminar on
environmental building practices. Upon his return to South Africa, he
applies the ideas and recommendations acquired at the seminar to build a
new, environmentally friendly office complex. In this case, there are no
board meetings or similar evidence to determine if Xs ideas emanate from
the internationally acquired recommendations. Unless it can be proven
that the ideas were unique, and that persons who did not attend the
seminar would have been unable to come up with similar ideas, it cannot
be concluded that X utilised or consumed the internationally acquired
ideas in South Africa.
But does utilised and consumed in the Republic necessarily translate into the
experiencing or reaping the benefits of the service? I do not believe that these terms
can be used as synonyms. For example, X undergoes plastic surgery while on
324
325
Hull G and Gibson C (2012) The VAT Handbook at 114.

77
holiday in France. She returns to South Africa after she has fully recovered. On her
return she experiences the benefit of the services through various compliments and
an offer of a modelling contract. Clearly, the services were physically rendered in
France and although she benefits from the services in South Africa it cannot be said
that the services are utilised and consumed in the Republic. Nevertheless, the
Explanatory Memorandum of the Taxation Laws Amendment Bill of 1998 stated:
When VAT was introduced, the intention was to levy VAT on the consumption in the
Republic. To achieve this, those supplies where consumption does not take place in the
Republic and the benefit of services is not enjoyed in the Republic, are subjected to VAT
at a rate of zero per cent
326
It is clear that the place of supply of services is not only determined by the physical
location where the supply is rendered, but also where the benefit of the service can
be experienced. This position was confirmed on appeal in Master Currency (Pty) Ltd
v CSARS. 327 Unless the place of consumption can be determined by an after sales
relationship between the supplier and the customer, or through the application of a
practical test, the actual place where the benefits of the services are experienced,
cannot be determined.
In Metropolitan Life Ltd v CSARS, 328 the taxpayer, pursuant to its business activities,
acquired international business advice and computer services. Since these services
were physically rendered outside of the Republic, the taxpayer contended that they
qualified as zero-rated supplies in terms of section 11(2)(k). 329 The zero rating
provision in section 11(2)(k) applies in respect of services rendered by a South
African registered vendor (or enterprise that is required to be registered as a vendor)
outside of the Republic. Therefore, section 11(2)(k) applies to exported services. As
a result, services rendered by a non resident vendor outside of the Republic, do not
qualify for zero rating in terms of section 11(2)(k). Davis J ruled that the court a quo,
therefore, had correctly held that the services do not qualify for zero rating under
326
Clause 89 of the Explanatory Memorandum on the Taxation Laws Amendment Bill 1998.
328
Metropolitan Life Ltd v CSARS 2009 (3) SA 484 (C).
329
Metropolitan Life Ltd v CSARS 2009 (3) SA 484 (C) at para [2]. In terms of section 11(2)(k), services that are
physically rendered outside of the Republic or at a customs control area would be zero-rated.
327
78
section 11(2)(k), and that the assessment was correct in taxing the supplies as
imported services. 330 He held further that the type of services provided would not
have qualified for zero rating had they been rendered in the Republic, and could,
accordingly, not qualify for zero rating under either section 11(2)(k) or section
14(5)(b). 331 Davis J confirmed that section 14(5)(b) provides for a zero rating on
imported services if the services would qualify for zero rating had they been
rendered in the Republic. 332 The court did not expressly deal with the place-of-supply
rules where the goods were physically rendered outside of the Republic. It appears
that the court came to the conclusion that the services, despite their having been
physically rendered outside of the Republic, were imported into South Africa as they
were applied by an enterprise resident in South Africa.
Dendy, in criticising Davis Js judgment, opines that section 11(2)(k) is not restricted
to exported services, but also applies to supplies physically rendered outside of the
Republic by any foreign vendor. 333 According to Dendys interpretation, the place of
supply is not determined so much by the place of utilisation, as by the location where
the services are physically rendered. Despite various criticisms, until such time as
the ruling by the SCA is overturned, or clear place-of-supply rules are incorporated,
the current position stands and the place of supply is the location where the services
are utilised and consumed in the Republic.
3.4.2.4.2 Business-to-Consumer transactions
Where services are supplied by a non-resident vendor to a resident non-vendor or to

a resident vendor who does not apply the services in making taxable supplies, the
transaction is subject to VAT to the extent that the services have been utilised or
consumed in the Republic. 334 For purposes of the VAT Act, 335 resident as defined
330
Metropolitan Life Ltd v CSARS 2009 (3) SA 484 (C) at para [4].
332
333
Dendy M (2012) The VAT Treatment of Imported Services at 22-33.
334
Section 7(1)(c) read with the definition of imported services in section 1 of the VAT Act 89 of 1991. Also
see Van der Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 377.
335
Act 89 of 1991.
331
79
in section 1 of the Income Tax Act 336 shall apply. 337 It is further provided that any
person or company that carries on any enterprise or other activity in the Republic, or
has a fixed place of business or permanent place in the Republic relating to the
enterprise, shall be deemed to be a resident. 338
The South African VAT system relies on a reverse-charge mechanism requiring the
recipient of the imported services (vendor or non-vendor) to account for VAT. 339 In
contrast to other VAT systems which distinguish between a reverse-charge
mechanism in the case of B2B transactions, and a self-assessment mechanism in
the case of B2C transactions, the South African system applies the reverse-charge
mechanism in both B2B transactions -in so far as the services are not applied in the
making of taxable supplies- and B2C transactions. 340
Determining the place of supply based on the utilised-and-consumed principle as
developed by the courts, is often difficult. In addition, the reverse-charge mechanism
relies on the recipients interpretation of where the services were utilised and
consumed. This can again best be illustrated by way of example:
Example 3.6: While X is waiting for a flight in an international tax-free
zone, his portable computer is infected with a virus. X purchases and
336
Act 58 of 1962.
In terms of section 1 of the Income Tax Act 58 of 1962, resident means any
(a) Natural person who is:
(i)
Ordinarily resident in the Republic; or
(ii)
Not at any time during the relevant year of assessment ordinarily resident in the Republic, if
that person was physically present in the Republic(aa) for a period or periods exceeding 91 days in aggregate during the relevant year of assessment,
as well as for a period or periods exceeding 91 days in aggregate during each of the five years
of assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those preceding years of
assessment,
in which case that person will be a resident with effect from the first day of that relevant year of
assessment.
(b) person (other than a natural person) which is incorporated, established or formed in the Republic or
which has its place of effective management in the Republic;
but does not include any person who is deemed to be exclusively a resident of another country for
purposes of the application of any agreement entered into between the government of the Republic and
that other country for the avoidance of double taxation.
338
339
Section 14 of the VAT Act 89 of 1991. See paragraphs 3.4.6 and 3.4.8 below on the effectiveness of the
reverse-charge mechanism as a tax collection method.
340
For more information on the difference between the reverse-charge mechanism and the self-assessment
mechanism in other VAT systems, see Van der Brederode R and Gendron PP (2013) The Taxation of Crossborder Interstate Sales in Federal or Common Markets World Journal of VAT/GST Law vol 2 issue 1 at 1-23.
337
80
downloads an anti-virus application and cleans his portable computer. X is

of the opinion that the digital products were supplied in the international
tax-free zone and were not utilised and consumed in South Africa.
It could be argued that the software application is applied continuously until the
licence expires. Should the license only expire after X has returned to South Africa, it
can be said that the digitised products were applied partly in South Africa and partly
in the international tax free zone. The anonymity of online transactions relating to
digitised products, makes the tracking and tracing of these transactions impossible. I
do not foresee that SARS would scan portable computers and record the software
loaded on them upon exit and entry of every person at border posts. Furthermore, in
the case of example 3.6, it will be difficult to determine if X did in fact utilise and
consume the software in South Africa from the date of his return until the expiry date
of the software. However, where the services were rendered while X was physically
present in the international tax free zone in an international airport in South Africa,
the services would be subject to VAT since the services were physically rendered
within the borders of the Republic. 341
Example 3.7: While X is travelling through Japan by rail, he logs onto a
video streaming service provider and pays an amount to watch a film (the
so-called pay-per-view principle). The film is not downloaded to Xs
portable device, but is directly streamed to it. In other words, once viewed,
X cannot recall the film from the device. If he wishes to view the film again,
he must again pay.
In this case, it can be argued that, in applying section 11(2)(k), the service
(entertainment) was rendered at the place where X physically found himself when
the streaming commenced . Should X have found the film of any value, enabling him
to apply the ideas in it upon his return to South Africa, it could be argued, by applying
the definition of imported services, that the service was utilised and consumed in
South Africa. Practically, this would be impossible to detect.
341
81
From case law it is clear that in the case of intangible services, the phrase utilised
and consumed in the Republic, entails that the place of supply is the place where
the services were applied and not where they were physically rendered. 342
Similarly, in the case of digitised products, the actual place of delivery is irrelevant
where the benefits of the digitised products can be applied in multiple jurisdictions.
In the case of combined supplies, where the supply was partly rendered in the
Republic and partly rendered in a foreign jurisdiction, determining the place of supply
becomes troublesome.
Example 3.8: X, a South African resident, acquires specialised software
from Y (a South African resident and registered VAT vendor) who
develops and installs the software on Xs computer at a location in South
Africa. The software requires configuration in the southern and northern
hemispheres respectively. Y configures the software for the southern
hemisphere at a location in South Africa and appoints Z, a foreign branch
of Y, to configure the software at a location in Europe while X travels to
Europe.
Can it be said that the supply was partly rendered in the Republic and partly in
Europe? Furthermore, should the taxation of the supply be apportioned in
accordance with the value of the supply that was rendered in the Republic and in
Europe?
Section 8(15) of the VAT Act 343 provides that:
For the purposes of this Act, where a single supply of goods or services or of goods and
services would, if separate considerations had been payable, have been charged with tax
in part at the rate applicable under section 7(1)(a) and in part at the rate applicable under
section 11, each part of the supply concerned shall be deemed to be a separate supply...
Where the work necessary to produce a single supply was rendered by Y in the
Republic, that part of the supply shall constitute the making of a taxable supply for
342
Metropolitan Life Ltd v CSARS 2009 (3) SA 484 (C); CSARS v De Beers Consolidated Mines Ltd (503/2011)
[2012] ZASCA 103 (1 June 2012).
343
Act 89 of 1991.
82
purposes of section 7(1)(a) and should be taxed in South Africa. 344 In applying
section 8(15), it is clear that the part of the supply that was rendered outside of the
Republic, would not be subject to South African VAT since it was rendered outside of
the Republic. 345 What if the foreign part of the supply was rendered by Y, the South
African VAT vendor, while both Y and X were abroad? Can it be said that the foreign
part of the supply is subject to South African VAT at a zero rate in terms of section
11(2)(k)? In other words, could the supply be treated as an exported supply of
services, and the place of supply be deemed to be the foreign location?
Dendy opines that on a proper interpretation of section 11(2)(k), services that are
physically performed 346 outside of the Republic, irrespective of whether this is done
by a South African vendor or a foreign non-vendor, should be zero-rated. 347
Consequently, the services are treated as an exported service in the case of
supplies by a South African vendor, and as foreign supplied services, if supplied by a
foreign non-vendor. In ITC 1812, 348 before it was taken on appeal in Metropolitan
Life Ltd v CSARS, 349 Waglay J ruled that services which are physically rendered
outside of the Republic by a VAT vendor to a person who consumes the services
inside or outside of the Republic, should be subject to VAT at zero percent in terms
of section 11(2)(k). 350 However, where the services were rendered by a foreign nonvendor to a South African resident, the services must be consumed at a foreign
location to qualify for such zero rating. 351 Waglay J further ruled that section 11(2)(k)
does not apply to imported services. 352 This was confirmed on appeal in Metropolitan
344

346
Dendy is of the opinion that the word rendered should be interpreted to mean performed in the
context of the supply to avoid an irrational result. Performed or performance of a supply refers to the actual
deed of making the supply as oppose to the receipt of a supply as contemplated by the meaning of
rendered.
347
348
ITC 1812 68 SATC 208.
349
350
ITC 1812 68 SATC at para 36.
351
ITC 1812 68 SATC at para 36.
352
ITC 1812 68 SATC at paras 18 and 38. Waglay J came to this conclusion after having consulted the preamended version of section 11(2)(k) which applied until 1997 at which point it was replaced by the current
version of section 28(a) of the Taxation Laws Amendment Act 25 of 1997. Before it was amended, section
11(2)(k) applied only to the domestic supply of goods and services as contemplated in section 7(1)(a) which
happened to be physically performed outside of the Republic. The amended section 11(2)(k) applies to services
that were physically rendered outside of the Republic in terms of section 7(1). The deletion of the reference to
subparagraph (a) in the amendment clearly indicates that section 11(2)(k) applies to section 7(1) as a whole,
345
83
Life Ltd v CSARS. 353 In other words, where services are rendered to a South African
resident at a foreign location, the services are deemed to be supplied in South Africa
in terms of the definition of imported services in so far as they are utilised and
consumed within the Republic.
When the consumption principle, as established in case law, is applied to example
3.8, to establish the place of supply, practical evidence would be required to
determine if X consumed the services in Europe or in South Africa. Where the
services were consumed both in South Africa and abroad, the South African VAT
portion should be apportioned in terms of section 8(15). Under the reverse-charge
mechanism, what constitutes South African consumption and foreign consumption
will in most cases rely on the interpretation of the consumer. Should an investigation
be required when the matter is audited, it could require expert evidence and costly
litigation which could amount to more than the VAT ultimately payable on the
supplies. That is, if the transaction could be detected in the first place.
Dendy argues that where services were physically rendered at a location outside of
South Africa, the place of supply should be the location where the services are
physically rendered, where it is ultimately utilised or consumed is irrelevant because
it was physically rendered outside of the Republic as contemplated in section
11(2)(k). 354 Where services are non-physically rendered outside of the Republic, in
the case of digital supplies, section 11(2)(k) will not apply and such services, where
rendered to a South African resident, could be construed as imported services. 355
The place of supply is deemed to be the place where the services are utilised and
consumed by the recipient.
As a result of technological advances, the place of supply can be in different
locations if the physically rendered and utilised-and-consumed principles are
applied respectively. In an attempt to eliminate such variable results, SARS has
considered the development of deeming provisions for specific types of service such as telecommunication services and intellectual property rights.
and not only section 7(1)(a). Dendy therefore correctly points out that Waglay Js ruling to exclude imported
services from the application of section 11(2)(k) is incorrect.
353
Metropolitan Life Ltd v CSARS 2009 (3) SA 484 (C) at paras 27 and 33.
354
355
Emslie T (2010) Editorial Note The Taxpayer vol 59 issue 1 at 2.
84
3.4.2.4.3 Telecommunication services
Section 23(1)(e) of the Taxation Laws Amendment Act 356 introduced subparagraph
(iv) to the definition of enterprise in section 1 which provides that any person who
continuously or regularly supplies telecommunication services to any person who
utilises those services in the Republic, is deemed to conduct an enterprise in South
Africa. Conversely, where telecommunication services are utilised in the Republic,
irrespective of the physical place of delivery, they are deemed to have been supplied
in the Republic. This provision has, however, not yet been promulgated. 357 The
reason for the non-promulgation is unknown.
It should be noted that the amendment was proposed as an exception to the general
rule as an anti-avoidance measure to regulate and appropriately tax these
transactions as they are rarely brought to account. 358
3.4.2.4.4 Intellectual property rights
SARS has proposed that where a foreign enterprise grants rights for the use of
intellectual property to a South African enterprise or resident, the foreign enterprise
must register as a South African VAT vendor if it receives royalties which exceed the
VAT threshold. 359 Therefore, the place of supply of the right or licence to use
intellectual property in South Africa is in the Republic, irrespective of the actual place
of physical supply. SARS has, in the meantime, withdrawn this proposal to the extent
that foreign vendor registration is not required where the foreign vendor does not
356
Act 27 of 1997.
Classen incorrectly states that this provision is already enforced by SARS. See Classen L (2012) E-commerce
and Value Added Tax in Papadopoulos S and Snail S (eds) (2012) Cyberlaw@SAIII at 119.
358
Explanatory Memorandum on the Taxation Laws Amendment Bill 1997
359
VAT News 13-December 1999
http://www.sars.gov.za/tools/Printbody.asp?pid=47320 [accessed on 18 March 2013]; also see De Koker A
and Kruger D (2008) Value Added Tax in South Africa: Commentary at para 8.10; Bagraim P (2003) Another
Taxing Task Jutas Business Law vol 9 part 3 at 112.
357
85
have a fixed or permanent establishment in South Africa. 360 Nevertheless, SARS

announced in VAT News 37 361 that it will again review the initial proposals made in
VAT News 13. It is not certain when this deeming provision will be applied.
3.4.3 When is the supply made?
VAT vendors must account for VAT at the end of each tax period based on their type
of vendor registration. It is therefore important to determine the time of supply to
know which supplies must be accounted for in respect of a particular tax period. 362 In
addition, when changes in the VAT rate occur, it is important to determine the time of
supply so that VAT may be charged at the rate applicable to that particular
transaction. 363 Generally, the time of supply is when an invoice is issued, or when
payment is received - whichever is the earlier. 364 For purposes of this thesis, the
discussion is limited to the determination of the time of supply in the case of goods
and services being imported.
3.4.3.1 Time of supply: Imported goods
Where tangible goods are imported, the time of supply is deemed to be the date on
which the goods are deemed to have been imported into South Africa in terms of the
360
Temkin S (2003) Attempt to Force VAT on Royalties may Encourage Disinvestments Businessday
http://www.taxtalkblog.com/?p=5221 [accessed on 18 March 2013].
361
VAT News 37-February 2011
http://www.sars.gov.za/home.asp?pid=4&cx=009878640050894574201%3Akubtv50zym&cof=FORID%3A10%3BNB%3A1&ie=UTF8&q=VAT+royalties&sa=%3CIMG+alt%3D%22Click+here+to+begin+your+search%22+src%3D%22images%2Fse
archButtonBackground.gif%22%3E&siteurl=http%3A%2F%2Fwww.sars.gov.za%2F [accessed on 18 March
2013].
362
Silver M and Beneke C (2012) VAT Handbook 8th edition at 29; De Koker A and Kruger D (2008) Value Added
Tax in South Africa: Commentary at para 10.1.
363
De Koker A and Kruger D (2008) Value Added Tax in South Africa: Commentary at para 10.1.
364
Section 9(1) of the VAT Act 89 of 1991. Also see Silver M and Beneke C (2012) VAT Handbook 8th edition at
33; De Koker A and Kruger D (2008) Value Added Tax in South Africa: Commentary at para 10.1.
86
Customs and Excise Duty Act. 365,
366
Goods are deemed to be imported into South
Africa:
(a)
in the case of goods consigned to a place in the Republic in a ship or aircraft, at

the time when such ship or aircraft on the voyage or flight in question, first
came within the control area of the port or airport authority at that place, or at
the time of the landing of such goods at the place of actual discharge thereof in
the Republic if such ship or aircraft did not on that voyage or flight call at the
place to which the goods were consigned or if such goods were discharged
before arrival of such ship or aircraft at the place to which such goods were
consigned;
(b)
in the case of goods not consigned to a place in the Republic but brought
thereto by and landed therein from a ship or aircraft, at the time when such
goods were so landed;
(c)
in the case of goods brought to the Republic overland, at the time when such
goods entered the Republic;
(d)
in the case of goods brought to the Republic by post, at the time of importation
in terms of paragraph (a), (b) or (c) according to the means of carriage of such
goods; and
(e)
in the case of goods brought to the Republic in any manner not specified in this
section, at the time specified in the General Notes to Schedule No. 1 or, if no
such time is specified in the said General Notes in respect of the goods in
question, at the time such goods are considered by the Commissioner to have
entered the Republic.
367
Where goods are imported into South Africa for home consumption, the time of
supply is deemed to be the date on which the goods entered the Republic for home
consumption. 368
365
Act 91 of 1964.
367
Section 10(1) of the Customs and Excise Duty Act 91 of 1964.
368
Section 13(1)(i) of the VAT Act 89 of 1991. See also Bagraim P (2003) Another Taxing Task Jutas Business
Law vol 9 part 3 at 111.
366
87
3.4.3.2 Time of supply: Imported services
The time of supply in the case of the imported services, is deemed to be the date on
which an invoice is issued by the supplier or the recipient in respect of the supply, or
the date on which any payment is made by the recipient in respect of that supply whichever is the earlier. 369
In the case of e-commerce, it is often difficult to verify whether a transaction has
occurred. When dealing with software updates, the recipient is often unaware that
the electronic device has downloaded software from a local or foreign service
provider. Invoices are rarely issued when updates are downloaded. These
transactions often stem from a prior agreement with a service provider, seller, or
manufacturer of the device, or with the software developer. Depending on the
agreement, the recipient either pays a lump sum prior to commencement of the
service from which the value of each upgrade or update is then deducted, or, the
costs of the updates are deducted from the recipients credit card account. In the
case of a prepaid agreement, the payment was not made in respect of a specific
service or digitised product. Instead, it could be argued that the payment constitutes
a mere deposit of money into an account which the supplier may debit upon delivery
of services or goods. The time of supply should, accordingly, be construed as the
actual date on which the prepaid account is debited. In the absence of account
statements or debit notifications, the recipient would be unaware of the time of
supply. In many cases service providers merely inform users of a low account
balance. Records of actual transactions are not disclosed to users unless they are
requested by the user, often at a fee.
The word invoice is defined to mean a document notifying an obligation to make
payment. 370 An invoice need not constitute a tax invoice to determine the time of
supply. 371 A contract, document, or detailed statement indicating the amount payable
should, in principle, qualify as an invoice. De Koker and Kruger opine that the legal
369
Section 14(2) of the VAT Act 89 of 1991; De Koker A and Kruger D (2008) Value Added Tax in South Africa:
Commentary at para 8.10; Silver M and Beneke C (2012) VAT Handbook 8th edition at 74.
370
371
88
position of conditional contracts should be considered before a document is

classified as an invoice. 372 For example, where X and Y conclude an agreement in
terms of which X will pay Y R1000 when Y has completed painting Xs roof, the
obligation to pay is deferred until Y completes the service. The agreement in itself
cannot constitute an invoice because it does not reflect an obligation to pay since the
obligation it reflects is conditional. 373 Only when the service has been completed (the
condition fulfilled) can it be said that the agreement constitutes an invoice. 374
Similarly, where payment was made in terms of a prepaid agreement, the payment
was not made to fulfil an obligation to pay. The recipient of the service could, in
principle, cancel the agreement and have his money returned. The supplier would
only be entitled to debit the account once it had commenced with service. It could,
therefore, be argued that the agreement could constitute an invoice once the
condition that would allow the service provider to debit the account has been fulfilled.
The recipient is required to request account statements on a regular basis to allow
him to determine the time of supply. The cost of acquiring these statements could in
certain cases exceed the actual VAT liability.
In the case of credit cards, unless the card holder is regularly informed of
transactions on his credit card via e-mail or sms, he would only become aware of
them once he receives and examines his credit card statement. The credit card
holder could, in principle, be completely unaware that software was downloaded to a
device and that he paid for this. The time of supply is deemed to be the date when
the payment was made or when the invoice was issued - whichever is the earlier -,
irrespective of whether or not the recipient was aware of such payment. Since the
recipient of the services must account for VAT in terms of the reverse-charge
mechanism, this could place a compliance burden on him to examine his credit card
statements regularly, or to scan all electronic devices in search of evidence reflecting
payments for downloads or updates, if he is to determine the date of supply. Failure
to do so could result in non-compliance or late submission of VAT returns, which
could, in turn, result in the levying of penalties and interest.
372
374
373
89
Although delivery notifications are not treated as invoices and cannot be used to
determine the time of supply, 375 in the case of automatic software updates, delivery
or update notifications can prompt the recipient to search for payment evidence or
request an invoice. While the compliance burden is not completely eliminated, this
practical approach could simplify the recipients VAT declaration.
3.4.3.3 Time of supply: Vouchers
In a competitive market, suppliers often reward customers for their loyal and
continued support by either issuing vouchers or adding additional products to the
original supply at no cost. In the case of vouchers, the question arises whether the
time of supply for VAT purposes, is when the voucher was issued and imported into
South Africa, or, when it is exchanged for digital products? The issuing of a voucher
does not amount to a supply of goods or services, but merely constitutes the issuing
of a payment method that can be utilised by the recipient when he chooses. 376
Accordingly, when the voucher is used as payment for digital products, the time of
supply would still be determined by the date of the issuing of an invoice or the date
of any payment whichever is earlier.
What happens where the voucher entitles the recipient to a right to goods and
services? Can the voucher still be classified as a payment method? Is the time of
supply the date of issue of the vouchers, or when the vouchers are exchanged for
the goods or services? The VAT Act 377 provides no clear rules on the treatment of
such vouchers. Two arguments can be raised. The voucher should be treated as a
payment method and VAT must be levied when the voucher is exchanged for the
goods and services, or, the issuing of the voucher constitutes the supply of goods
(the tangible voucher) or services (the intangible voucher) and must be taxed when
the voucher is issued.
375
Money is excluded from the definitions of goods and services in section 1. Any bill of exchange,
promissory note, bank draft, postal order, or money order is deemed to be money in terms of the definition
of money in section 1 of the VAT Act 89 of 1991.
377
Act 89 of 1991.
376
90
3.4.4 What is the value of the supply?
VAT is levied on the value of the supply. It is, therefore, essential that the correct
value, as calculated in terms of the VAT Act, 378 is determined. 379 As a general rule,
the value to be placed on goods or services in determining the VAT on the supply is
the consideration for the supply, less that portion of the consideration that
represents tax itself. 380 Simply put, the value for VAT purposes is consideration
minus tax. In so far as payment is made in a form other than money, the open
market value of that consideration will be applied. 381 It is important to note that the
open market value of the consideration is to be used, and not that of the supplies.
This ensures that VAT is appropriately levied on the value added to the supplies.
Consequently, VAT is levied on the value that the purchaser is willing to pay for the
goods or services. Where no consideration is paid, or where the consideration paid
is less than the open market value, the open market value of the supplies is used to
determine the value where the transaction was concluded between connected
persons. 382,
383
As was explained in 3.4.1 above, when it comes to the taxation of
378
Act 89 of 1991.
De Koker A and Kruger D (2008) Value Added Tax in South Africa: Commentary at para 11.1; Doussy E (2001)
The Taxation of Electronic Commerce and the Implications for Current Taxation Practices in South Africa at 96.
380
Section 10(2) of the VAT Act 89 of 1991. Also see De Koker A and Kruger D (2008) Value Added Tax in South
Africa: Commentary at para 11.1; Silver M and Beneke C (2012) VAT Handbook 8th edition at 29.
381
Section 10(3)(b) of the VAT Act 89 of 1991. Also see De Koker A and Kruger D (2008) Value Added Tax in
South Africa: Commentary at para 11.2; Silver M and Beneke C (2012) VAT Handbook 8th edition at 30.
382
Africa: Commentary at para 11.3; Silver M and Beneke C (2012) VAT Handbook 8th edition at 39-41.
383
connected persons means:
(a) any natural person (including the estate of a natural person if such person is deceased or
insolvent) and:
(i) any relative of that natural person (being a relative as defined in section 1 of the Income
Tax Act) or the estate of any such relative if the relative is deceased or insolvent; or
(ii) any trust fund in respect of which any such relative or such estate of such relative is or
may be a beneficiary; or
(b) any trust fund and any person who is or may be a beneficiary in respect of that fund; or
(c) any partnership or close corporation and:
(i) any member thereof; or
(ii) any other person where that person and a member of such partnership or close
corporation, as the case may be, are connected persons in terms of this definition; or
(d) any company (other than a close corporation) and:
(i) any person (other than a company) where that person, his spouse or minor child or any
trust fund in respect of which that person, his spouse or minor child is or may be a
beneficiary, is separately interested or two or more of them are in the aggregate interested in
379
91
imports, the VAT Act 384 differentiates between imported goods and imported
services.
3.4.4.1 Imported goods
The VAT Act 385 differentiates between goods imported from a Southern African
Customs Union (SACU) area, and goods that are imported from areas other than the
SACU area.
3.4.4.1.1 Goods imported from the SACU
Members of SACU are, apart from South Africa, Botswana, Lesotho, Namibia, and
Swaziland. The value on which VAT will be levied on goods imported into South
Africa from these countries is the value that would have been used for customs duty
purposes had the goods been subject to such duty. 386 The transaction value of the
goods is generally applied to determine the value of the goods for custom duty
10 per cent or more of the companys paid-up capital or 10 per cent or more of the companys
equity share capital (as defined in section 1 of the Income Tax Act) or 10 per cent or more of
the voting rights of the shareholders of the company, whether directly or indirectly; or
(ii) any other company the shareholders in which (being shareholders as contemplated in the
definition of shareholder in section 1 of the Income Tax Act) are substantially the same
persons as the shareholders in the first-mentioned company, or which is controlled by the
same persons who control the first-mentioned company; or
(iii) any person where that person and the person referred to in subparagraph (i) or his
spouse or minor child or the trust fund referred to in that subparagraph or the other company
referred to in subparagraph (ii) are connected persons in terms of this definition; or
(e) any separate enterprise, branch or division of a vendor which is separately registered as a vendor
under the provisions of section 50 and any other such enterprise, branch or division of the vendor; or
( f ) any branch, division or separate enterprise of an association not for gain which is deemed by
subsection (5) of section 23 to be a separate person for the purposes of that section and any other
branch, division or separate enterprise of that association, whether or not such other branch, division
or separate enterprise is a vendor; or
(g) any person and any superannuation scheme referred to in section 2 (2) (vii), the members of
which are mainly the employees or office holders or former employees or office holders of that
person.
384
Act 89 of 1991.
385
Act 89 of 1991.
386
Section 13(2)(b) of the VAT Act 89 of 1991. Also see De Koker A and Kruger D (2008) Value Added Tax in
South Africa: Commentary at para 8.3; Silver M and Beneke C (2012) VAT Handbook 8th edition at 69; Stiglingh
M (ed), Koekemoer AD, Van Schalkwyk L, Wilcocks JS, De Swardt RD (2013) Silke: South African Income Tax at
1021.
92
purposes. 387 The Commissioner may, in writing, determine the value of the goods
irrespective of the presence of a transaction value. 388
3.4.4.1.2 Goods imported from countries outside the SACU
The value on which VAT is payable on goods imported from countries other than
SACU members is:
i) the value of the goods for customs purposes;
ii) plus the amount of any customs duty, surcharge, or tax (other than VAT);
iii) plus an amount equal to ten per cent (mark-up) of the value of the goods for
customs purposes. 389
Where the Minister has issued a regulation determining the value of goods for
purposes of determining the VAT on their importation, the greater of such value or
the value as determined on the import thereof, shall apply. 390
In the case of electronically ordered and physically delivered goods, the goods will
enter a customs area before being despatched to the recipient. The GATT Valuation
Agreement, in terms of which international guidelines for the valuation of imported
goods for the purpose of taxation are set out, was adopted in 1979 and implemented
in South Africa on 1 July 1983. 391 The WTO Agreement on the Implementation of
Article VII of the GATT 1994, replaced the GATT Valuation Agreement, but the
fundamental valuation principles did not change. 392 Six methods are prescribed to
determine the value, in strict hierarchical order:
387
Section 65(1) of the Customs and Excise Duties Act 91 of 1964.

389
Africa: Commentary at para 8.2; Silver M and Beneke C (2012) VAT Handbook 8th edition at 68; Stiglingh M
(ed), Koekemoer AD, Van Schalkwyk L, Wilcocks JS, De Swardt RD (2013) Silke: South African Income Tax at
1021-1023.
390
391
Customs Valuation Guide (February 2002) www.sars.gov.za [accessed on 18 March 2013].
392
Customs Valuation Guide (February 2002) www.sars.gov.za [accessed on 18 March 2013].
388
93
i) the transaction value of the goods which is often determined by the

accompanying invoice or the insured value of the parcel; 393
ii) the transaction value of identical goods; 394
iii) the transaction value of similar goods; 395
iv) the deductive method where the value is derived from the selling price of
identical or similar goods within the Republic; 396
v) the computed method where the value is determined based on the build-up
costs of the goods; 397
vi) the fall-back method where one of the methods above are applied more
flexibly. 398
The existing valuation principles and methods can still be applied, despite the fact
that e-commerce will increase the workload of customs officials at designated ports
because of the increase in imported packages via post.
3.4.4.2 Imported services
The value to be placed on imported services, is the value of the consideration paid
as determined in section 10(3) of the VAT Act, 399 or the open market value of the
supply - whichever is the greater of the two. 400
Where an invoice was issued, or the actual amount can be determined through
account statements, the determination of the value for VAT purposes would be fairly
393

395
396
397
398
399
Act 89 of 1991.
400
Africa: Commentary at para 8.10; Silver M and Beneke C (2012) VAT Handbook 8th edition at 74; De Wet C and
du Plessis R (2004) Taxation (VAT) in Buys R (ed) (2004) CyberLaw@SAII at 281.
394
94
uncomplicated, provided that the actual payment reflects the open market value of
the digitised products.
It does, however, become problematic when invoices are not issued, payments
cannot be traced because there are no account statements, or there is a prepaid
agreement. It has been established above that the payment made in terms of a
prepaid agreement, does not constitute a payment in respect of the said service or
digital products until such time that the actual service or download has begun. 401
Therefore, despite the fact that the full prepaid amount can, in principle, be used to
purchase digital products, the value of the products can only be determined once the
actual supply takes place.
A further question that arises, is what value should be used where payment is made
by a voucher issued by the supplier or by a third party - such as a credit card
company - in terms of a loyalty scheme? Where the voucher was issued by a
supplier vendor and subsequently used by the consumer to make payment, the
vendor supplier should only account for VAT on that part of the consideration that
was not paid for by the voucher. 402 Can this provision be applied where the foreign
vendor is not registered as a vendor in the Republic, and is furthermore not required
to register as such? In terms of section 10(1), the provisions in the whole of section
10 shall apply to any 403 supply of goods and services. Accordingly, where the foreign
supplier issues a voucher to a recipient who subsequently uses the voucher to make
payment or partial payment for the delivery of digitised products, only that portion of
the value of the digitised products that is not paid for by the voucher would be
subject to VAT. Similarly, where a voucher was issued free of charge entitling the
recipient to digitised products, the value of the digitised products so exchanged shall
be disregarded. 404
Where a voucher was issued by a person other than the supplier, the issue becomes
more problematic. The value of the voucher issued by a vendor is deemed to be part
401
See paragraph 3.4.3.2 above.

Section 10(19) of the VAT Act 89 of 1991; Silver M and Beneke C (2012) VAT Handbook 8th edition at 32-33;
SARS (2013) Draft Interpretation Note: Vouchers Supplied at a Discount at 2
http://www.sars.gov.za/home.asp?pid=677 [accessed on 4 April 2013].
403
My emphasis.
404
402
95
of the consideration. 405 In other words, the value of the goods or services so
acquired, would be equal to the amount paid in money and vouchers. 406 Section
10(20) only applies to vouchers issued by vendors, i.e. persons or enterprises
registered as such in the Republic, or persons and enterprises who are required to
register as such in the Republic. I believe that the legislator did not intend to limit the
scope of this provision to resident vendors. The word any preceding the word
vendor should be construed to mean any such entity that issued the voucher.
Where a voucher was issued for consideration, and the holder is, on surrender,
entitled to goods or services specified on the voucher, the intrinsic value of the
voucher is taxed. 407 The value of subsequent supplies is deemed to be nil to avoid
double taxation. Vouchers or tokens which entitle the holder to multiple goods and
services which cannot be determined at the time of issue of the voucher, are
increasingly being issued. In addition, the supplier of such goods or services cannot
be determined upfront. These vouchers fall outside the scope of section 10(19) since
the goods and services to which the holder is entitled are not specified on the
voucher. Where these vouchers are redeemed for purposes other than a discount or
rebate, the value of the goods and not the consideration paid for the voucher must
be used to calculate and levy VAT. 408 For example, where the voucher was issued
for consideration of R100 which entitles the holder to goods and services to the
value of R120, the vendor must account for VAT on R120.
Where consideration cannot be established, the open market value of the supplies
should be used as the value for VAT purposes. It is, however, uncertain whether the
open market value should be used where no consideration is paid. Generally, the
open market value is used where no consideration is paid or where the consideration
paid is less than the open market value where the supplier and the recipient are
connected persons. 409 In the case of imported services where it cannot be
established that the supplier and the recipient are connected persons, it is not certain
whether section 14(3) will prevail over section 10(3). In other words, can the open
405

Silver M and Beneke C (2012) VAT Handbook 8th edition at 32-33.
407
408
Section 10(18) of the VAT Act 89 of 1991; SARS (2013) Draft Interpretation Note: Vouchers Supplied at a
Discount at 2-4 http://www.sars.gov.za/home.asp?pid=677 [accessed on 4 April 2013].
409
Section 10(4)(a) and (b) of the VAT Act 89 of 1991.
406
96
market value be applied in the case of imported services where no consideration is

paid and where the parties are not connected persons? For example, where digitised
products are delivered to the recipient at no cost as reward for loyal and continued
support, should the supply be taxed at the open market value? It should be noted
that the provision in section 10(3) is essentially an anti-avoidance provision. It is
aimed at combating transactions entered into at a cost lower than market value with
the intention of avoiding VAT or donations tax.
As a result, where the supplier
delivers digital products to the recipient at no cost, and the parties are not connected
persons, the transaction should be treated as a gift. This means that the value for
VAT purposes should be nil.
In the case of file sharing or torrent downloads, the recipient receives digital files
from a server at a nominal subscription fee, or at no charge at all. Generally, no
payment is made for the actual digital product being downloaded. In most cases, the
files shared are in breach of international copyright laws, and are commonly referred
to as illegal downloads. While the VAT Act 410 does not specifically provide for the
taxation of illegal supplies, no section prohibits the levying of VAT on illegal
supplies. 411 In applying the principles of tax neutrality, no differentiation should be
made between legal and illegal supplies. 412 Therefore, where the supply in the form
of illegal downloads connotes imported services as defined, VAT should be levied
in terms of section 7(1)(c). The problem, however, arises in determining the value.
Should the value of the illegal download be used, or should the value of a legal
equivalent of it be used? It could be argued that the open market value of illegal
downloads is nil for two reasons. In the first instance, because the files are
distributed free of charge, no value can be attached to them. Secondly, in an open
market, where the files are available at no cost, no one would be willing to pay for
them. It could, accordingly, be argued that the value of the legal equivalent should be
applied. This should, however, be done with caution, so as not to tax the transaction
410
Act 89 of 1991.
Van Zyl SP (2011) The Value Added Tax Implications of Illegal Transactions PELJ vol 14 no 4 at 342-343
http://www.nwu.ac.za/webfm_send/4734 [accessed on 18 March 2013].
412
Zyl SP (2011) The Value Added Tax Implications of Illegal Transactions PELJ vol 14 no 4 at 342-343
http://www.nwu.ac.za/webfm_send/4734 [accessed on 18 March 2013].
411
97
as a pure punitive measure to eliminate illegal downloads, especially as there is

usually legislation prohibiting such actions. 413
Occasionally, file sharing is done legally or is even encouraged. For example, where
an artist who is trying to establish a market, allows his music to be shared freely on
the Internet in order to promote himself. In cases where these files are stored on CD
and distributed at no charge, the supply would not be subject to VAT based on the
open market value, unless it can be proven that the supplier and recipient are
connected persons. 414 Similarly, where the files are distributed or seeded 415 on the
Internet and downloaded by a resident recipient, the value of the supply should be
nil.
The VAT Act 416 provides no calculation method where payment is effected in foreign
currency. Where a foreign supplier is required to register for VAT in South Africa, he
would be required to levy VAT on the Rand value of the supply. This would be
difficult, especially in cases where the supplier operates from a foreign location or in
cloud. Differing transaction, commission, and conversion costs between financial
institutions could result in different conversion rates at the same time on the same
day.
Van der Merwe correctly points out that where an item can be supplied as a tangible
thing (goods), or an intangible thing (services), it should, in principle, be taxed at the
same rate. 417 It is clear from the discussion above that the VAT Act 418 differentiates
between the taxation of digitised products that are imported in a tangible form (which
are classified and taxed as imported goods), and the same digitised products that
413
All Members of the World Trade Organisation are bound to implement the Agreement on Trade Related
Aspects of Intellectual Property Rights (TRIPS). In terms of article 9.1 of TRIPS, all members must give effect to
Articles 1 to 21 of the Berne Convention for the Protection of Literary and Artistic Works. Article 9 of the Berne
Convention, in turn, reserves for the author the exclusive right to reproduce a copyright work. As a download
involves making a copy of the downloaded work, the legality of the download is determined by copyright law.
See also the Agreed Statement concerning article 1(4) of the WIPO Copyright Treaty: it confirms that [t]he
reproduction right, as set out in Article 9 of the Berne Convention, and the exceptions permitted thereunder,
fully apply in the digital environment, in particular to the use of works in digital form.
414
415
Seeding connotes the action of sharing downloaded files on the Internet by uploading file particles or
torrents onto a server. The more seeds available, the faster downloaders (leechers) can download files.
416
Act 89 of 1991.
417
Van der Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 380-381.
418
Act 89 of 1991.
98
are imported in an intangible form by electronic delivery (should they be classified

and taxed as imported services). This differentiated treatment violates the principle
of tax neutrality. In addition, it could lead to market distortions where the demand for
cheaper digital supplies will replace and exceed the demand for physically stored
digital products. In the USA the demand for digitally delivered music is increasing,
and it is anticipated that the demand will, in the near future, exceed that for actual
CDs. 419 This can be attributed to the reduced cost of digitally supplied music, and the
non-taxation of cross-border digital supplies. 420 If this trend continues, music stores
will be forced to scale down or even close in certain areas where CD sales have
dropped below profitable levels. The fact that digital imports are, in principle, taxable
in South Africa - unlike the case in the USA - does not immunise the South African
music industry from similar market distortions or even possible collapse. The
differentiated tax calculation method resulting in a lower product value being used for
imported digital supplies as opposed to imported goods, can have the same
distorting effect, however prolonged.
3.4.5 Was the supply made by a taxable entity?
In a VAT system based on consumption, the burden of VAT must be carried by the
person or entity that ultimately uses or consumes the supply. To require consumers
(non-vendors) to account for VAT on each and every purchase in terms of a reversecharge mechanism is nonsensical from both an administrative and an economic
point of view. VAT systems, therefore, provide for deemed taxable entities to collect
VAT on behalf of revenue authorities. Unless otherwise indicated in the Act, the VAT
Act 421 primarily provides for the following taxable entities:
419
Koranteng J (2003) Value Added Tax Poses Problems for EU Digital Sales Billboard vol 115 issue 26 at 61.
Koranteng J (2003) Value Added Tax Poses Problems for EU Digital Sales Billboard vol 115 issue 26 at 61.
421
Act 89 of 1991.
420
99
a) In the case of the supply of goods and services by a registered VAT vendor,
the VAT vendor making the supplies must collect VAT as the deemed taxable
entity. 422
b) In the case of imported goods, the person who imports such goods shall be
the deemed the taxable entity charged with the burden of collecting tax. 423 In
practice, VAT will be levied and collected by customs officials or agents
appointed by customs. The person who imported the goods is only burdened
with the payment of VAT to customs or to the appointed agent.
c) In the case of imported services, the recipient of the service must collect and
pay VAT thereon in terms of section 14(1). 424
Determining the taxable entity is fairly uncomplicated under the deeming provisions.
However, in the case of imported services it is often difficult to establish whether the
recipient of the goods or services must account for VAT in terms of the reversecharge mechanism, or whether the foreign supplier is required to register as a VAT
vendor in the Republic, and collect VAT on the supplies as if they constituted a
domestic supply in terms of section 7(1)(a) read with section 7(2). 425
3.4.5.1 Registration: Requirements
Every person who carries on an enterprise, and who makes taxable supplies that
exceed or are likely to exceed R1 million in a twelve month period, is required to
register as a VAT vendor. 426
In terms of the definition of enterprise, the following elements must be present
before it can be concluded that a person is carrying on an enterprise:
i) a continuous or regular activity;
ii) carried on within the Republic;
iii) for the supply of goods and/or services;
422

424
425
See further discussions below on the feasibility of registration at paras 3.4.8.1; 4.3.8.3.3; 5.3.8.1; and 7.8.2.
426
423
100
iv) for consideration.

It is trite that a foreign supplier would supply either goods or services to a resident
recipient against payment. For that reason, the elements of supply and
consideration will not be discussed.
3.4.5.1.1 A continuous or regular activity
The concept continuous or regular is not defined and it has not been judicially
considered in the context of VAT. 427 A continuous activity is an activity that is
prolonged over a period of time without interruption. 428 SARS interprets a
continuous activity as an ongoing activity (i.e. the duration of the activity has neither
ceased in a permanent sense, nor has it been interrupted in a substantial way), or a
progression of separate and continuous steps to bring an activity to conclusion. 429 A
regular activity is an activity that is carried on at periodical or frequent intervals. 430
Once-off imports, or imports that take place infrequently, would thus not qualify as a
continuous or regular activity for purposes of vendor registration. It is not clear how
the word regular should be interpreted, or whether an activity that is performed
three or four times annually would qualify as a regular activity.
De Koker and Kruger state that where a person comes to South Africa regularly to
procure wool, despite that person not being resident in the Republic, he partially
carries on an enterprise as defined. 431 SARS interprets regular as an activity that
takes place repeatedly at reasonably fixed intervals. 432 The term regular, therefore,
excludes a transaction or transactions that happen by chance, and should be
427
Botes M (2011) South African VAT and non-Resident Business International VAT Monitor vol 22 no 6 at
397.
428
th
Collins English Dictionary (2004) 6 edition; Soanes C and Stevenson A (eds) (2008) Concise
Oxford English Dictionary.
429
SARS (2011) Guide for Fixed Property and Construction (VAT409) at 9; Stiglingh M (ed), Koekemoer AD, Van
Schalkwyk L, Wilcocks JS, De Swardt RD (2013) Silke: South African Income Tax at 1019.
430
th
Collins English Dictionary (2004) 6 edition; Soanes C and Stevenson A (eds) (2008) Concise
Oxford English Dictionary.
431
432
SARS (2011) Guide for Fixed Property and Construction (VAT409) at 9; Stiglingh M (ed), Koekemoer AD, Van
101
construed to mean something that happens more than once and is likely to happen
again.
3.4.5.1.2 Carried on within the Republic
The South African VAT system is not restricted to supply of goods and services
rendered in South Africa. 433 Exported goods and services are zero-rated. 434 Although
zero-rated supplies are often confused with non-taxable supplies, attention should be
drawn to the fact that zero-rated supplies are, in principle, taxable supplies. 435 This
means that a supply that is made from South Africa to any place in the world, is, in
principle, subject to VAT. 436 It is often unclear to what extent a foreigners business
activities in South Africa constitute conducting an enterprise wholly or partly in South
Africa. 437 Silver and Beneke suggest that the mere export of goods and services to
South African customers from any foreign country by a foreign supplier, does not
constitute an enterprise carried on wholly or partially in the Republic. 438 Wagley J,
however, is of the opinion that where such services are regularly supplied to South
Africans, the foreign supplier could be deemed to be carrying on an enterprise in
South Africa, and should register here as a VAT vendor. 439
As there are no definitive place-of-supply rules in the Act, this issue cannot be finally
resolved. 440 Furthermore, the position adopted by SARS as to what does and does
not constitute an enterprise, often changes, or is not implemented consistently. 441
433
434
435
A vendor is entitled to claim input VAT on the goods and services acquired in its enterprise in so far as the
goods and services are acquired to make taxable supplies. Where the vendor makes exempt supplies only, it
will not be entitled to claim input VAT credits. It can therefore be deduced that zero-rated supplies are taxable
supplies. The supplies are taxed at zero percent.
436
437
438
439
ITC 1812 SATC 207 at para 14; Dendy M (2012) The VAT Treatment of Imported Services at 34.
440
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 244; Bagraim P
(2003) Another Taxing Task Jutas Business Law vol 9 part 3 at 110; De Swardt RD and Oberholzer R (2006)
Digitised Products: How Compliant is South African Value Added Tax? Meditari Accountancy Research vol 14
no 1 at 20.
441
102
In recent years, according to the commentators Silver and Beneke, SARS has
indicated that a foreigner would be deemed to be carrying on an enterprise in the
Republic if:
the foreigner leases goods to a resident and receives regular rental income in
exchange; 442
the foreigner grants the use or licence to a resident in respect of any patent,
trademark, copyright, know-how, trade secret, or similar intellectual property
right and as a result receives royalties from a person in South Africa; 443
The foreigner supplies telecommunication services to be used by a South

African resident and as a result receives consideration. 444
This confusion is exacerbated by the fact that SARS has not yet implemented
section 23(1)(e) of the Taxation Laws Amendment Act 445 requiring foreign suppliers
of telecommunication services to register as vendors in the Republic. In addition,
SARS has withdrawn its position on foreign suppliers of intellectual property issued
in 1999. SARS has recently announced its intention to review its initial position and
re-implement it. 446 A survey by De Swardt and Oberholzer, reveals that this hedged
approach by SARS has caused confusion among tax practitioners. 447 Half of the
respondents believed that a foreign supplier of digital goods is conducting an
enterprise in the Republic, while the other half believed the opposite. 448 Furthermore,
should these amendments be promulgated, additional multi-lateral treaties would
442

http://www.sars.gov.za/tools/Printbody.asp?pid=47320 [accessed on 18 March 2013]; also see De Koker A
and Kruger D (2008) Value Added Tax in South Africa: Commentary at para 8.10; Bagraim P (2003) Another
Taxing Task Jutas Business Law vol 9 part 3 at 112.
444
Section 23(1)(e) of the Taxation Laws Amendment Act 27 of 1997.
445
Act 27 of 1997.
446
VAT News 37-February 2011
http://www.sars.gov.za/home.asp?pid=4&cx=009878640050894574201%3Akubtv50zym&cof=FORID%3A10%3BNB%3A1&ie=UTF8&q=VAT+royalties&sa=%3CIMG+alt%3D%22Click+here+to+begin+your+search%22+src%3D%22images%2Fse
archButtonBackground.gif%22%3E&siteurl=http%3A%2F%2Fwww.sars.gov.za%2F [accessed on 18 March
2013].
447
448
443
103
have to be negotiated to afford SARS extra-territorial powers to enforce these

provisions. This could prove impossible.
In the 2013 Budget Speech, Finance Minister Gordhan proposed that foreign
suppliers of e-books, music, and other digital products, must be required to register
for VAT. 449 How and when the proposal will be implemented is not certain.
3.4.5.2 Duty to register?
Every person who conducts an enterprise becomes liable to register as a VAT

vendor:
(a) At the end of any month where the total value of taxable supplies made by that person
in the period of 12 months ending at the end of that month in the course of carrying on
all enterprises has exceeded R1 million;
(b) At the commencement of any month where there are reasonable grounds for believing
that the total value of the taxable supplies to be made by that person in the period of 12
months reckoned from the commencement of the said month will exceed the
abovementioned amount.
450
Where a person becomes liable to register as a vendor in terms of section 23(1), he

must apply for registration no later than 21 days after having become liable to
register. 451
The words every person in section 23(1), and persons in the heading of section
23, clearly indicate that residency is not a requirement to register as a VAT vendor,
provided that supplies were made in the course and furtherance of an enterprise.
This said, section 23(2) requires a non-resident to furnish the Commissioner with the
particulars of a representative vendor in South Africa. In addition, particulars of the
non-resident persons bank account at a bank registered as such in terms of the
449
Gordhan P (2013) 2013 Budget Speech at 21

http://www.treasury.gov.za/documents/national%20budget/2013/speech/speech.pdf [accessed on 27
February 2013].
450
451
104
Banks Act, 452 must also be submitted. 453 In other words, the non-resident person
must have a South African bank account. Failure to submit the required particulars or
documentation could see the Commissioner deeming that the person as not having
applied for registration. 454 Although the requirements in section 23(2)(ii) do not
demand that the non-resident applicant have a fixed abode or establishment in South
Africa, the only inference that can be drawn is that he should have some sort of
physical presence in the Republic. 455 This physical presence can either be through a
representing vendor, or by an establishment of some sort. Botes opines that the fact
that a non-resident business does not have a fixed establishment in South Africa for
income tax purposes, does not necessarily mean that it does not carry on an
enterprise in South Africa for VAT purposes. 456
It is not clear whether a person must have a physical presence before he is required
to register, or, because the person is required to register, he is required to have a
physical presence. This confusion stems from the inconsistent position taken by
SARS with regard to the meaning of a regular and continuous activity carried on
within the Republic as set out above. I am of the view that once it has been
established that the non-resident person is carrying on a regular activity in the
Republic and is then required to register as a vendor, he should have a physical
presence in the Republic as a result of this registration requirement. Bagraim notes
that there is no requirement that a vendor must have a fixed or permanent
establishment to conclude that it is conducting an enterprise. 457 This view is
supported by Van der Merwe. 458
It is clear that the physical presence requirement serves as no more than an
administrative aid to the Commissioner. The lack of a physical presence does not
mean that the non-resident person has not carried on regular activity in the Republic.
Steyn states that the mere fact that a non-resident supplier does not have a fixed
452
Act 94 of 1990.
Section 23(2)(ii)(bb) of the VAT Act 89 of 1991.
454
Section 23(2)(ii) of the VAT Act 89 of 1991.
455
Naicker K (2010) The VAT Implications of E-commerce Taxtalk January/February 2010 at 9.
456
Botes M (2011) South African VAT and non-Resident Business International VAT Monitor vol 22 no 6 at
397.
457
458
453
105
place of business in the Republic, does not mean that he is relieved of the obligation
to register as a South African VAT vendor. 459
Section 23(3)(d) provides for voluntary vendor registration where:
that person is continuously and regularly carrying on an activity which, in consequence
of the nature of that activity, can reasonably be expected to result in taxable supplies
being made for a consideration only after a period of time and where the total value of
taxable supplies to be made can reasonably be expected to exceed R50 000 in a period
of 12 months.
The Commissioner may refuse or cancel the applicants registration where the
applicant:
(i) does not have a fixed place of business or abode; 460
(ii) does not keep proper accounting records relating to the enterprise; 461
(iii) has not opened a bank account for purposes of the enterprise; 462
(iv) has previously registered as a VAT vendor in terms of the VAT Act 89 of
1991, or as enterprise under the General Sales Tax Act 103 of 1978, and has
failed to perform his duties in terms of either of the Acts. 463
In the case of voluntary vendor registration, the vendor is required to have a fixed
place of business or abode in the Republic. A mere physical presence of some sort,
as is required by compulsory registration, is not sufficient. Still, if one considers the
other requirements in section 23(7), the impression is created that the requirements
were introduced as an administrative tool to assist the Commissioner in combating
VAT fraud. This position is further emphasised by the practice as regards registration
applied by SARS officials since 2009. In terms of this procedure, interviews are held
with applicant vendors (voluntary and compulsory registrations) or representative
vendors. 464 The procedure was implemented to guarantee that applicant registrants
459
461
462
Section 23(7)(c) of the VAT Act 89 of 1991.
463
Section 23(7)(d) of the VAT Act 89 of 1991.
464
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 245; Anon
(2008) SARS Act to Protect Taxpayers from VAT Abuse The Professional Accountant at 31.
460
106
have a genuine place of business from which an enterprise is conducted. 465 The selfassessment and reverse-charge mechanisms open the South African VAT system to
to VAT fraud. It is common practice to register a fictitious enterprise as a VAT vendor
and then claim input VAT based on false and irregular tax invoices. To further
eliminate fraud, SARS officials are also entitled to inspect the business premises or
establishment to confirm that an actual enterprise is being conducted, or to require
vendors to undergo biometric tests, such as fingerprint verification. 466 This is in line
with international best practice to eliminate VAT fraud. 467 As a result of the VAT
registration clean-up process, VAT vendor registration has declined by 0,89% since
2009. 468 In addition to the registration requirements provided for in the VAT Act, 469
section 22(3) of the Tax Administration Act 470 provides that SARS may require the
applicant registrant to produce biometric evidence if it is required to identify him or to
combat fraud. Where the taxpayer is obliged to register as a VAT vendor under the
VAT Act 471 but has failed to do so, SARS may register the taxpayer as such
unilaterally where it is found to be appropriate. 472
E-commerce is characterised by anonymity and the convenience that a fixed place of
business or physical establishment provides is not required. In the case of
electronically ordered and physically delivered goods, the supplier can operate its
enterprise from a server located anywhere in the world. Essentially, no physical
presence - in the form of a shop, warehouse, or office - is required. Orders can be
executed by instructing a third party to collect the items ordered from its warehouse
and dispatch them to the recipient. The third party then acts as dispatch agent on
behalf of the supplier.
This virtual or non-physical existence is even more prevalent in the case of
electronically ordered and delivered goods. Digitised products can be stored on
465
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 245; Anon
(2008) SARS Act to Protect Taxpayers from VAT Abuse The Professional Accountant at 31.
466
Anon (2008) SARS Act to Protect Taxpayers from VAT Abuse The Professional Accountant at 31.
467
Anon (2008) SARS Act to Protect Taxpayers from VAT Abuse The Professional Accountant at 31.
468
National Treasury and SARS (2012) 2011 Tax Statistics
18 March 2013].
469
Act 89 of 1991.
470
Tax Administration Act 28 of 2011. This Act came into force on 1 October 2012.
471
Act 89 of 1991.
472
Section 22(5) of the Tax Administration Act 28 of 2011.
107
multiple servers open to remote access. Orders are executed by connecting the
recipients device to the nearest server and starting to download. The enterprise can
be operated from these multiple servers or from a portable device. Save for the initial
setup of servers, and the occasional upload of merchandise on the server, no human
intervention is required in conducting the actual transactions.
Where it has been established that the e-commerce supplier regularly and
continuously makes taxable supplies to recipients in the Republic in excess of R1
million, the supplier is required to register as a VAT vendor in terms of section 23(1).
The supplier should, consequently, in compliance with the requirement to register as
a VAT vendor, open a South African bank account, appoint a representative vendor,
or establish some sort of physical presence in South Africa. These requirements will
frustrate e-commerce suppliers and eliminate the convenience of virtual trade.
Foreign suppliers could terminate trade with South African residents which could
result in market distortions. Silver and Benekes opinion that the mere export of
goods and services to South Africa does not amount to the carrying on of an
enterprise, should be more closely considered. 473 Where the foreign supplier
exports 474 goods and services to South Africa, he acts as mere dispatcher of the
goods, and does not actively take part in any business-like activities in the Republic.
This should be contrasted with a person who imports goods and services to be
distributed for home consumption. The importer actively engages in activities in the
Republic that resemble the conducting of trade. According to Bargraim, where the
suppliers server, or one of its servers, is located in South Africa, or where the
supplier has a warehouse in South Africa from which supplies are dispatched, the
supplier is conducting an enterprise in South Africa and should register as a
vendor. 475 She further holds the position that some form of physical presence is
required before it can be said that the supplier is carrying on an enterprise in the
Republic. 476 It could, therefore, be argued that where digitised products are ordered
by South African residents from a foreign supplier, the delivery (by export to South
Africa) of the products does not amount to the making of a supply in the hands of the
473

My emphasis.
475
476
474
108
foreign supplier. The supplier would not be carrying on an enterprise in the Republic.
The recipient importer, so it could be argued, carries the burden of collecting VAT.
Due to a lack of clear rules or policy statements from SARS, the supplier is likely to
make an incorrect tax decision. 477
3.4.5.3 The non-resident non-vendor importer as taxable entity
De Swardt and Oberholzer pose the question whether a foreign supplier of digitised
products should levy South African VAT on the supplies, irrespective of whether the
supplier is registered or ought to be registered as a VAT vendor. 478 This would be
the case where it is found that the supplier is carrying on an enterprise within the
Republic. 479 In such an eventuality, the supplier would have to verify the residency
status of the recipient before it could levy South African VAT on the transaction. 480
De Swardt and Oberholzer opine that the complex residency rules applied in South
Africa place an enormous compliance burden on such vendors. 481 This would,
however, be no different for resident suppliers who are registered as VAT vendors
and who supply digital products. They, too, must determine the residency status (or
at least the location where the recipient finds himself at the time of supply) of the
recipient to determine if VAT should be levied at the standard rate (in the case of
domestic supplies), or at the zero rate (in the case of exported supplies).
Furthermore, there is no indication in the VAT Act 482 that a foreign vendor whose
taxable supplies do not reach the R1 million threshold, is obliged to register as a
VAT vendor in South Africa. Since non-vendors do not levy VAT on supplies, the
non-vendor supplier is deemed to be the final consumer of the goods supplied. In
477
Tax? Meditari Accountancy Research vol 14 no 1 at 21; Botes M (2011) South African VAT and non-Resident
Business International VAT Monitor vol 22 no 6 at 399.
478
479
480
481
482
Act 89 of 1991.
109
other words, the VAT paid by the non-vendor supplier cannot be recovered from its
customers. Similarly, where a foreign supplier is not registered as a VAT vendor in
South Africa, it cannot collect (nor is it required to collect) VAT from its customers. In
this case, however, the foreign supplier cannot be deemed to be the final consumer
as it never paid VAT. In this case, the burden to account for VAT shifts to the person
who imported the digitised products (services). 483
The importer recipient is,
accordingly, construed to be the taxable entity in terms of the reverse-charge

mechanism.
This poses the question of whether a non-resident person who imports digitised
products to South Africa while he is physically present in the Republic, should
account for VAT on the importation thereof? In terms of the definition of imported
services, imports by non-residents for their own consumption while physically
present in the Republic, do not amount to imported services. The non-resident
importer will, therefore, not be a taxable entity in so far as the digitised products so
imported are not utilised and consumed by a resident.
3.4.6 In the course or furtherance of an enterprise
Where goods and services are imported in the course and furtherance of an
enterprise, the VAT Act 484 differentiates between the import of goods and of
services. In the case of imported goods, the importer must account for output VAT
on the value of the imported goods, irrespective of whether or not the goods are to
be applied in the course and furtherance of its enterprise. 485 The output VAT
accounted for by the importer may be claimed as input VAT in so far as the goods
will be applied in the making of taxable supplies. In practice, this amounts to a mere
accounting exercise.
483

Act 89 of 1991.
485
Section 7(1)(b) read with section 7(2) of the VAT Act 89 of 1991. Also see Silver M and Beneke C (2012) VAT
Handbook 8th edition at 67; De Koker A and Kruger D (2008) Value Added Tax in South Africa: Commentary at
para 8.1.
484
110
The definition of imported services provides that the import of services will not attract
VAT in so far as they will be utilised and consumed in the course and furtherance of
an enterprise. In other words, VAT is deferred to the actual taxable supplies made by
the importer vendor. Many authors and tax practitioners are of the view that the
supply of digitised products between businesses (B2B transactions) will not attract
VAT. 486 This view is, strictly speaking, incorrect. The mere fact that digitised
products are imported by a registered VAT vendor, does not justify the conclusion
that the transaction will not attract VAT. It is required that the vendor must apply the
imported services (digitised products) in the making of taxable supplies if the
transaction is not to attract VAT. 487
In CSARS v De Beers Consolidated Mines Ltd, 488 De Beers obtained financial
advice from NM Rothschild and Sons, a company based in London. The advice was
obtained to assist its board of directors in making critical decisions on a transaction
proposed to De Beers by a consortium that would eventually change the company
from a public to a private entity. De Beers contended that the services obtained from
NM Rothschild were necessarily linked and concomitant to its mining business. 489 As
De Beers elected to trade as a public company, it was required by the Securities
Regulation Code imposed by section 440C of the Companies Act, 490 and the listing
requirements of the Johannesburg Stock Exchange, to obtain the advice in question
to protect its shareholders. 491
The Commissioner contended that NM Rothschilds services did not relate to the
core business of De Beers, namely, mining and selling diamonds. 492 Instead, the
services sought were in the interest of the departing shareholders. 493 The court ruled
that a clear distinction exists between the execution of the enterprises business, and
486
487
Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 243; Bagraim P
(2003) Another Taxing Task Jutas Business Law vol 9 part 3 at 111; De Wet C and du Plessis R (2004)
Taxation (VAT) in Buys R (ed) (2004) CyberLaw@SAII at 281.
488
489
490
Act 61 of 1973 (repealed).
491
CSARS v De Beers Consolidated Mines Ltd (503/2011) [2012] ZASCA 103 (1 June 2012) at paras [23-25].
492
493
111
the special duties imposed on a company in the interests of its shareholders. 494 In
casu, the duty imposed on De Beers was found to be too far removed from the
advancement of the enterprise to justify that the services were acquired for the
purposes of making taxable supplies. 495 Southwood AJA (Leach JA and McLaren
AJA concurring) ruled that not all services acquired by an enterprise are necessarily
applied in the making of taxable supplies. 496 The nature of the taxpayers enterprise
must be examined to determine whether the services acquired were used in the
making of taxable supplies. 497 In casu, the taxpayers enterprise did not involve the
trading of shares or the holding of shares and the receipt of dividends - it involved
diamond mining and trading. 498 It can, therefore, not be said that the services
acquired from NM Rothschild were utilised in the furtherance of its enterprise and in
the making of taxable supplies. As the services were applied for purposes other than
the making of taxable supplies, they should be treated in the same way as B2C
transactions. Consequently, the importer is required to pay VAT on the imported
services in terms of the reverse-charge mechanism.
This finding is based on a very restrictive understanding of what the making of
taxable supplies in pursuit of the taxpayers enterprise as a public listed company
involves. 499 There are numerous costs that a publicly listed company is bound to
incur in fulfilment of its duties towards shareholders, which arise purely from the fact
that the business is operated as a certain entity, and which do not directly relate to
the operational requirements of the business. 500 The SCAs judgment threatens the
deduction of all of these expenses. 501
494
496
497
498
499
Editorial Note (2012) Case Law: CSARS v De Beers Consolidated Mines Ltd Supreme Court of Appeal, 1 June
2012, Case no 503/11The Taxpayer vol 61 no 6 at 107; Moss-Holdstock C (2012) There be Dragons: The VAT
Implications arising from De Beers SCA judgment World Journal of VAT/GST LawI vol 1 issue 2 at 211-216.
500
2012, Case no 503/11 The Taxpayer vol 61 no 6 at 107; Moss-Holdstock C (2012) There be Dragons: The VAT
501
2012, Case no 503/11 The Taxpayer vol 61 no 6 at 107; Moss-Holdstock C (2012) There be Dragons: The VAT
495
112
A blanket conclusion that imported services by VAT vendors (B2B transactions) are
applied to make taxable supplies by virtue of the vendors registration status, cannot
be supported. Each case should be examined on its merits. In a self-assessment
regime, the interpretation of what constitutes in the making of taxable supplies lies
with the taxpayer. As can be seen from CSARS v De Beers, the taxpayers
interpretation can often be incorrect despite the existence of clear factual indications
that invalidate the taxpayers views. These transactions could therefore go
undetected and untaxed unless a VAT audit is done on the taxpayer. But does SARS
have the manpower and will to conduct regular VAT audits? And how many VAT
vendors should be audited and how often? Will the VAT, interest, and penalties so
levied justify the cost and effort involved in a VAT audit or subsequent litigation?
3.4.7 Is the transaction taxable?
Goods that are listed in Schedule 1 to the VAT Act, 502 and which are imported in
terms of section 7(1)(b), are exempt from VAT. 503
In the case of imported services where the services are taxed in terms of section
7(1)(a), these will not also be subject to VAT in terms of section 7(1)(c). 504 This
provision prevents the double taxation of imported services.
Where the supply of imported services would, if they were supplied in the Republic,
be subject to VAT at a zero rate in terms of section 11, or exempted from VAT in
terms of section 12, the imported supply would equally be subject to VAT at zero
percent or be exempt from VAT. 505 This provision underpins the principle of tax
neutrality so as not to differentiate between services rendered in the Republic, and
services imported into the Republic. Dendy is of the opinion that the courts 506
application of section 14(5)(b) in so far as it applies to foreign supplied services
502
Act 89 of 1991.
504
505
506
As well as the interpretations by Emslie in The Taxpayer vol 59 issue 1 at 2, and De Koker A and Kruger D
(2008) Value Added Tax in South Africa: Commentary at para 8.1
503
113
that would have been zero-rated or exempt had they been rendered in South Africa is incorrect. 507 He interprets section 14(5)(b) to mean that where a foreign supplier of
services supplies services in South Africa while he is physically present in South
Africa, such services will either be zero-rated or be exempt if the services would
have been zero-rated or exempt had they been rendered by a South African VAT
vendor. 508
Where a foreign supplier is required to register as a VAT vendor in South Africa, it
will have to avail itself of Schedule 1 and the provisions of sections 11 and 12 to
avoid the incorrect taxation of supplies. While the same burden applies to resident
vendors, it should be noted that foreign vendors do not necessarily supply goods and
services to South African residents exclusively. In the case of e-commerce, suppliers
ship their goods or deliver their supplies worldwide. Determining the VAT status and
rate of the supply would place an additional compliance burden on the supplier. The
South African VAT rate system is fairly uncomplicated as it provides only for
standard rated, zero-rated, and exempt supplies. It does not provide for multiple
rates. This does not, however, prohibit the legislator from introducing multiple rates
at some future date. This would place an even greater compliance burden on foreign
suppliers. While software applications can easily be applied to determine the country
and product-specific VAT rates, the development and implementation cost of
software could negatively impact on the viability of trade with South Africa. The
unreliability of software could further lead to an incorrect tax application, which could
then further result in bad customer relations, or even tax penalties and interest.
These factors could deter foreign suppliers from trading with South African residents
and lead to market distortions.
3.4.8 Collection mechanisms
The anonymity of e-commerce transactions often creates a situation where the

recipient of the goods or services is an unidentifiable private consumer or
507
508

114
unregistered business. It is therefore virtually impossible to enforce VAT payments

on these transactions, even if they are found to be taxable. 509 Where it is assumed
that the supplier bears the burden of collecting and accounting for VAT, the
enforcement becomes difficult if the supplier is situated beyond the fiscal jurisdiction
of SARS. 510
In the case of physically imported goods, tax collection can be administered at
border posts. VAT collection at border posts is dependent on adequately trained
custom officials. Unskilled, undedicated, and careless custom officials could lead to
inconsistent VAT collection or, in some cases, the failure to tax parcels. As ecommerce becomes more popular among South African residents, an increase in
parcels could lead to a bottleneck at border posts. 511 This bottleneck may be
exacerbated by a shortage of staff or a slow valuation, taxing, and clearing process.
This could, in turn, frustrate consumers and suppliers which could result in a loss in
confidence in e-commerce. In addition, the transaction charge currently levied by
SARS on the valuation of the supply, often exceeds the VAT payable. This could
lead to market distortions.
The VAT Act 512 currently provides a VAT exemption for small parcels containing
books, newspapers, journals, or other printed material with a value of less than R100
that are imported into South Africa. 513 It is not certain whether this provision was
introduced to avoid a potential bottleneck resulting from an increase in imports as a
result of an increased popularity in e-commerce. Van der Merwe states that the small
parcel exemption could be applied to prevent such bottlenecks. 514 She warns,
however, that in the light of the relatively weak currency, inflation, and other rising
costs, consideration should be given to increasing the amount allowed under the
small parcel exemption to prevent future bottlenecks. 515 In the Draft Taxation Laws
Amendment Bill of 2011, an increase in the small parcel exemption to R500 was
509
511
512
Act 89 of 1991.
513
Section 13(3) read with para 2 of Schedule 1 of the VAT Act 89 of 1991.
514
515
510
115
proposed. 516 The proposal has, however, not been included in subsequent amending
legislation. Goods with a customs value of under R500, and which are exempt from
duties under Schedule 1 of the Customs and Excise Act, 517 are exempted from
VAT. 518
In the case of digital imports, no physical parcels can be examined, valued and taxed
by customs officials. Based on the discussion of the different taxable entities in
paragraph 3.4.5, different scenarios can be identified.
3.4.8.1 B2C transactions: Supplies by foreign registered VAT vendors
SARS has in the past, in cases where compliance levels were low, attempted to
make vendor registration compulsory through the implementation of deeming
provisions. For example, SARS has indicated that a foreigner would be deemed to
be carrying on an enterprise in the Republic if:
the foreigner grants the use or licence to a resident in respect of any patent,
trademark, copyright, know-how, trade secret or similar intellectual property
and as a result receives royalties from a person in South Africa; 519
the foreigner supplies telecommunication services to be utilised by a South

African resident and as a result receives consideration. 520
These deeming provisions are yet to be implemented. I am unaware of the reason

for the delay. It is also yet to be seen whether the proposal that foreign suppliers of
e-books, music, and other digital products will be required to register, will be
implemented.
516
Section 144(1) of the Draft Taxation Laws Amendment Bill of 2011.

Customs and Excise Act 91 of 1964.
518
Paragraph 1(v) of Schedule 1 of the VAT Act 89 of 1991.
519
http://www.sars.gov.za/tools/Printbody.asp?pid=47320 [accessed on 18 March 2013]; De Koker A and Kruger
D (2008) Value Added Tax in South Africa: Commentary at para 8.10; Bagraim P (2003) Another Taxing Task
Jutas Business Law vol 9 part 3 at 112.
520
Section 23(1)(e) of the Taxation Laws Amendment Act 27 of 1997.
517
116
Should a foreign supplier be required to register in terms of existing registration

requirements discussed above, 521 VAT must be levied on supplies made by it in
terms of section 7(1)(a). In other words, the supply will be treated as a domestic
supply. The recipient of the imported services would, therefore, not be required to
account for VAT.
The current VAT registration process applied by SARS in conjunction with the
physical presence requirement, or through the appointment of a representative
vendor, places an unacceptable compliance burden on foreign suppliers. Even if the
foreign supplier is willing and able to overcome the VAT vendor registration hurdle,
the duties associated with vendor status could further hamper the suppliers
business efficacy. This is especially evident in cases where the foreign supplier
makes supplies in multiple jurisdictions.
The duties that would be imposed on a foreign supplier, generally, include:
to provide SARS with correct and accurate information; 522
to submit VAT returns on time and make VAT payments in a timely fashion; 523
to include VAT on all prices and advertisements; 524
to keep accurate accounting records for five years. 525
Each of these duties will now be discussed.
521
See paragraphs 3.4.5.1-3.4.5.2 above.

VAT 404: Value Added Tax for Vendors (2011) at 93
http://www.sars.gov.za/home.asp?pid=4&cx=009878640050894574201%3Akubtv50zym&cof=FORID%3A10%3BNB%3A1&ie=UTF-8&q=vat+decision+416 [accessed 18 March
2013].
523
2013].
524
2013].
525
2013].
522
117
3.4.8.1.1 Provide SARS with correct and accurate information
The cost and effort of compliance could deter foreign suppliers from trading with
South African residents. Submitting accurate tax returns would require a foreign
vendor to invest in complex computer software that would rely on external factors
and information. These systems cannot operate accurately. For example, the foreign
supplier would rely on the IP address of the prospective customers to locate the
jurisdiction of supply so as to be able to tax the supply at the correct South African
VAT rate. What if the recipient is a foreign resident who happens to find himself in
South Africa at the time of the transaction when he is purchasing software for a
mobile device using a South African sim card to avoid roaming costs? Since the
software will be utilised and consumed by a non-resident, the supply should, strictly
speaking, not be subject to South African VAT. The suppliers software will be unable
to detect this. It could be argued that the wrongful taxation (over taxation) of these
types of transaction would be minimal and could be overlooked. That said, the
supplier could be subject to penalties and interest charges if it is found that it did not
accurately and correctly levy VAT on its supplies.
3.4.8.1.2 Submit VAT returns on time and make VAT payments on time
If one considers that the foreign VAT vendor possibly makes taxable supplies to
customers all over the world, and must submit tax returns in each of the countries
where the customers reside, a complicated paper-based submission service can
overburden the supplier. Depending on the suppliers customer base and their
location, the supplier could spend more time and money in completing and filing tax
returns, than selling and distributing its products. While in South Africa it is possible
to submit VAT returns electronically on the e-filing system, the same cannot be said
of all tax jurisdictions.
118
Since 28 June 2010, the VAT 201 form requires a separate declaration in respect of
the import and export of goods into and from South Africa. 526 As a result, vendors
accounting systems required reconfiguration to reflect the value of imports and
exports. 527 The purpose of the change is to ensure more accurate compliance, and
to enable SARS to identify possible import and export fraud cases that should be
investigated. No separate declaration is required for imported services. This could,
however, obstruct the ability of SARS to track and trace transactions and tax
undeclared and untaxed imports.
3.4.8.1.3 Include VAT in all prices and advertisements528
This duty presupposes that the supplier can identify the customers location, or at
least make provision for South African customers. In addition to this duty imposed by
the VAT Act, section 43(1)(i) of the Electronic Communications and Transactions
Act 529 provides that the supplier must display, on its website, the full price of the
goods and services, including a breakdown of what proportion of the price
constitutes taxes, transport, packaging and insurance. This provision has extraterritorial application despite any foreign law that might apply to the transaction. 530 It
is not certain whether the scope of the provision applies to potential transactions
between South African residents and foreign suppliers, or, only to suppliers that have
an established South African customer base. Either way, the supplier must reflect its
prices in South African Rand and also indicate how much of that amount constitutes
South African VAT.
The supplier can identify the customers location in two ways: The customer can
choose his location from a drop down list (or other method) after which the version of
the website applicable to that country will be displayed; or the supplier can apply
526
Delport K (2010) The New VAT Return Form has Arrived

http://www.ens.co.za/News/news_article.aspx?iID=373&iType=4 [accessed on 18 March 2013].
527
Delport K (2010) The New VAT Return Form has Arrived
http://www.ens.co.za/News/news_article.aspx?iID=373&iType=4 [accessed on 18 March 2013].
528
529
Act 25 of 2002.
530
Section 47(1) of the Electronic Communications and Transactions Act 25 of 2002.
119
complex software that can identify the customers location through locating the IP
address or GEO location. Both methods require costly software that can take a long
time to develop. This could deter foreign suppliers from trading in South Africa.
3.4.8.1.4 Keep accurate accounting records for five years
Section 29 of the Tax Administration Act 531 provides that any person who has
submitted, or should have submitted, a tax return, or would have submitted a tax
return but as a result of a threshold did not do so, must keep records for a period of
five years. Where records are kept in an electronic form they must be stored at a
location physically in South Africa, 532 in a form that will not distort the integrity of the
documents, 533 and which can be easily accessed by SARS. 534 A senior SARS official
may grant permission for the records to be kept at a location outside of South Africa
if the official is satisfied that:
(a) the electronic system used by the person will be accessible from the persons
physical address in South Africa for the duration of the period that the person is
obliged to retain records;
(b) the locality where the records are proposed to be kept will affect access to the
electronic records;
(c) there is an international agreement for reciprocal assistance in the administration of
taxes in place between South Africa and the country in which the person proposes to
keep the electronic records;
(d) the form in which the records are maintained satisfies all the requirements of these
rules apart from the issue of physical locality of the storage; and
(e) the person would be able to provide an acceptable electronic form of the record to
SARS on request within a reasonable period.
535
These requirements place an additional compliance burden on foreign suppliers. The

supplier or its accountants/auditors, are often better equipped to retain the integrity
of records where they are stored under their control at the location of establishment.
531
Act 28 of 2011.
Item 4.1 of Government Gazette no 787 of 1 October 2012.
533
Item 3.2 (a) of Government Gazette no 787 of 1 October 2012.
534
Item 3.2 (b) of Government Gazette no 787 of 1 October 2012.
535
Item 4.2 of Government Gazette no 787 of 1 October 2012.
532
120
Storing documents at a physical location in South Africa would be costly and in most
cases impractical. In the absence of a reciprocal tax administration agreement
between the country where the taxpayer is established and South Africa, the supplier
would not be able to keep records in the country where it is established.
The compliance burden and the cost of compliance would in most cases outweigh
the convenience of e-commerce and the prospective profits for suppliers. Any
proposal requiring foreign suppliers to register as VAT vendors in South Africa
should be approached with caution. The current strict registration requirements are
not in line with international best practice. In addition, the compliance burden
associated with registration may well deter foreign investors. This raises the question
of whether South Africas already volatile economy can afford diminishing foreign
trade. It has been recommended that a less burdensome registration process be
adopted in these cases. 536 These vendors should be exempted from complex and
cumbersome duties generally associated with resident vendors. The principle of tax
neutrality dictates that differentiation between taxpayers should be avoided. Finding
the balance between foreign and domestic vendor registration without causing
market distortions and unfair differentiation between taxpayers, remains a difficult
task.
3.4.8.2 B2C transactions: Supplies by foreign non-vendors
In the case of B2C transactions where the foreign supplier is not required to register
as a VAT vendor, the recipient (customer) must account for VAT under the reversecharge mechanism within 30 days of such import by completing a VAT201 form. 537
Tax compliance under the reverse-charge mechanism in the case of B2C
transactions is generally considered low. It is generally accepted that the self536
Van der Merwe B (2003) VAT and E-commerce SA Merc LJ vol 15 no 3 at 384; Steyn T (2010) VAT and Ecommerce: Still Looking for Answers? SA Merc LJ vol 22 no 2 at 245.
537
Section 14(1) of the VAT Act 89 of 1991; Van der Merwe B (2003) VAT and E-commerce SA
Merc LJ vol 15 no 3 at 383; Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA
Merc LJ vol 22 no 2 at 243; VAT 404: Value Added Tax for Vendors (2011) at 70
2013].
121
assessment procedure is more effective in the case of imports by VAT vendors. 538
Statistics, nevertheless show that tax compliance among individuals has increased
since 1994. 539 It may be argued that this could be as a result of stricter income tax
collection mechanisms and a general fear of SARS by individuals. 540 The fear of a
tax audit with possible penalties and interest resulting from non-compliance, is
known to coerce taxpayers into submitting regular and timeous tax returns. 541 This
fear is incited by the fact that SARS has certain mechanisms in place to cross check
information supplied by taxpayers. For example, payments received by one taxpayer
can be verified by information supplied by the issuer of the payment. However, these
verification mechanisms can seldom be applied in e-commerce transactions which
are characterised by anonymity and a general lack of a paper trail such as invoicing.
The coercion-theory is, as a result, ineffective in collecting VAT on cross-border ecommerce transactions. Taxpayers generally adopt the attitude that What SARS
does not know about, SARS cannot Tax. 542 A relatively small number of taxpayers
are diligent, and believe that they have a moral obligation towards the government
they voted for and believe in. 543
It is believed that digital imports by individuals would generally be of small value. 544
The average cellular phone consumer is likely to download applications that would
enhance the phones capabilities which are either available free of charge, or at a
538
Doernberg R and Hinnekens L (1999) Electronic Commerce and International Taxation at 350-352.
Charalambous L (2012) Magashule Decribes South Africas Tax Compliance Trends
http://www.thesait.org.za/news/93631/Tax24.mobi---Daily-News-Magashule-Describes-South-African-TaxComplian.htm [accessed on 18 March 2013].
540
Misra R (2004) The Impact of Taxpayer Education on Tax Compliance in South Africa MCom Thesis UKZN at
9-11
http://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/2505/Misra_Roshelle_2004.pdf?sequence=1
[accessed on 18 March 2013]
541
9-11
542
11
543
11
544
539
122
nominal fee. These would include ringtones, wallpaper, or similar enhancements. A

smaller number of individuals would be interested in sophisticated (often expensive)
software applications.
The cost and effort involved in reporting such transactions and paying VAT thereon,
and the administrative cost to SARS in receiving such payment, could outweigh the
actual VAT payments as illustrated below.
Example 3.9: X, who lives in a township some 20 km from Mokopane,
owns a smart phone. X downloads a new ringtone for his smart phone bimonthly from a foreign supplier. X pays R5 per download. X is a diligent
taxpayer who feels a moral obligation to pay taxes to the government. X
accounts for VAT on the download in terms of section 14 of the VAT Act
by completing a VAT 201 form at the nearest SARS office which is located
at the Magistrates Court in Mokopane. To get to the SARS office takes 1
hour by bus at a cost of R15 per trip one way. The VAT on the bi-monthly
transaction is R1.40.
Section 136(1) of the Taxation Laws Amendment Act 2011, 545 introduced an
exemption in respect of imported services similar to the small parcel exemption
contemplated in section 13(3). The insertion of paragraph (e) in section 14(5)
provides for an exemption of imported services where the value of such services is
less than R100 per invoice. Unlike the small parcel exemption on books, journals
and printed media, the imported services exemption is not limited to e-books, ejournals, or other electronic reading material. This small download exemption will
prevent the time and cost consuming compliance issues outlined in example 3.9
above.
Van der Merwe warns that exemption should not be seen as a quick solution to
compliance issues and costly administration. 546 The predictions by Goldstuck 547
show that consumer confidence in e-commerce will grow over the next 4 to 5 years.
This would encourage foreign suppliers to market digital products in South Africa
545
Act 24 of 2011.
547
See Chapter 2 in general.
546
123
where South African suppliers are lacking. The number of digital imports by nonvendors could increase dramatically. Despite the low value of such imports, the
increasing number of imports could erode the tax base if compliance figures remain
low.
The small download exemption in section 14(5)(e) could, accordingly, effectively
erode the tax base. While costly delivery has in the past deterred consumers from
purchasing physical goods from foreign suppliers, digital downloads from foreign
suppliers will become increasingly popular, especially where supplies are produced
at lower prices than local supplies. If the local market - which is effectively taxed shifts to a foreign market - which is ineffectively taxed or not taxed at all - the tax
base will erode. National Treasury should decide to what extent the self-assessment
process and the small download exemption would be cost effective to implement
without eroding the tax base. 548 Van der Merwe suggests that SARS should
implement a simpler consumer self-assessment process that would make it easier to
collect small amounts from a larger base of taxpayers. 549
Irrespective of the existence of consumer friendly self-assessment mechanisms, selfassessment remains dependent on the honesty and morality of taxpayers. 550 In a
society where the government is notorious for corrupt activities and failure to deliver
services, confidence in the state shrinks and its subjects are likely to be reluctant to
pay taxes.
3.4.8.3 B2B transactions: Supplies by a foreign registered vendor
In the case of B2B transactions where the supplier is registered, or is required to

register, as a VAT vendor in the Republic, the supplier must collect VAT on the
supplies as a domestic supply in terms of section 7(1)(a). The business recipient
would be entitled to an input VAT deduction in so far as the supplies are applied in
the course and furtherance of an enterprise, and in the making of taxable supplies.
548
550
Naicker K (2010) The VAT Implications of E-commerce Taxtalk January/February 2010 at 9.
549
124
The supplier would not be required to determine the vendor status of the customer
as the supply will be taxed regardless.
The objections raised in paragraph 3.4.8.1 above, apply.
3.4.8.4 B2B transactions: Supplies by foreign non-vendor
In the case of B2B transactions where the foreign supplier is not required to register
as a VAT vendor, the business customer must account for VAT on the supplies in so
far as the supplies were utilised and consumed by it for purposes other than in the
course and furtherance of an enterprise. 551 This must be done by completing a
VAT201 form within 30 days after such import. 552
It is generally accepted that the self-assessment procedure is more effective in the
case of imports by VAT vendors. 553 Registered vendors are required to declare selfassessed VAT when filing their VAT returns. 554 These vendors are known to SARS
and can easily be audited to prevent VAT fraud. In addition, the failure to self-assess
and general compliance irregularities, can be detected. 555 Furthermore, information
on VAT compliance practices can be communicated regularly to VAT vendors or tax
practitioners acting on behalf of vendors in completing tax returns. Through regular
communication, good relations can be established between SARS and vendors
which will create a VAT-compliance driven environment.
As the business customer must only account for VAT on imported services that it
utilises and consumes for purposes other than in the course and furtherance of an
enterprise, the effectiveness of the reverse-charge mechanism in detecting fraud and
compliance irregularities is diminished. Since the VAT201 form only provides for the
551
Section 7(1)(c) read with the definition of imported services in section 1.

Section 14(1) of the VAT Act 89 of 1991; Van der Merwe B (2003) VAT and E-commerce SA
Merc LJ vol 15 no 3 at 383; Steyn T (2010) VAT and E-commerce: Still Looking for Answers? SA
Merc LJ vol 22 no 2 at 243; VAT 404: Value Added Tax for Vendors (2011) at 70
2013].
553
Doernberg R and Hinnekens L (1999) Electronic Commerce and International Taxation at 350-352.
554
555
552
125
disclosure of imported services that were utilised and consumed for purposes other
than in the course and furtherance of an enterprise, compliance relies, in the main,
on the honesty and integrity of the taxpayer. Even where the taxpayer has made a
bona fide mistake in its interpretation of the nature of the supplies, in the absence of
tip-offs, imports by vendors (as final consumers) would go undetected.
The amount and value of B2B cross-border digital transactions could lead to a
serious erosion of the tax bases if these transactions go undetected and untaxed.
This is evident from the facts in CSARS v De Beers Consolidated Mines Ltd 556 and
Metropolitan Life Ltd v CSARS. 557
3.5 Conclusion
The South African VAT system was clearly designed in an era when electronic
commerce was the futuristic brainchild of computer technicians and dreamers. This
does not justify a conclusion that a VAT system is outdated per se, as many tax
systems are designed around the trends current to the era. Regular amendments are
required to keep VAT legislation up to date and able to tax consumption effectively.
Yet, too many amendments could negatively affect the principle of tax certainty. In
addition, amendments are often costly to develop and implement and the tax benefit
that they hold does not outweigh the overall cost of implementation. In this chapter I
have addressed whether the South African VAT Act 558 in its current form, can be
applied to tax cross-border digital transactions, and whether the current VAT
collection mechanisms could be applied to tax and collect VAT on digital imports
adequately. From the outset it was evident that the taxation of cross-border digital
transactions is limited by uncertainties in the VAT Act. 559
In the first instance, the classification of intangible products as either goods or
services has proved problematic. Despite the wide meaning of services, SARS has
556
558
Act 89 of 1991.
559
Act 89 of 1991.
557
126
not yet issued any policy statement as to whether or not it will treat digital products
as goods or services. That said, by the examples given in explanatory memoranda
issued by SARS, it appears likely that digital products will be classified as services
for purposes VAT collection.
Secondly, the absence of clear place-of-supply rules makes it difficult to establish the
place where digital products are supplied and to determine the jurisdiction where
they should be taxed. In addition, the phrase utilised and consumed in the Republic
in terms of the definition of imported services, is not clear and adds to the
confusion. This is particularly evident where intangible products or services are
physically delivered (downloaded) outside of the Republic, but where the benefit of
the service or product is experienced in the Republic.
Thirdly, determining the time of a supply in the case of automated or continuous ecommerce transactions is cumbersome. In these cases invoices are seldom issued
and the actual date of payment cannot be determined with certainty.
Fourthly, it is uncertain whether a foreign supplier of digital products to residents in
the Republic, is required to register as a VAT vendor in the Republic. The attempts
by SARS to compel foreign vendor registration in certain economic sectors, indicate
that foreign vendors could be required to register as vendors if the supplies made in
South Africa exceed the R1 million threshold. It is further uncertain when (and under
what terms) the proposed compulsory registration of foreign suppliers of e-books,
music, and other digital products will be implemented. It is also not clear if the
proposal will follow the existing vague place-of-supply rules.
Moreover, the
cumbersome VAT vendor registration process, and the requirement that the vendor
must have a fixed address in South Africa could discourage foreign vendor
registrations which could further lead to market distortions.
Fifthly, the self-assessment method relies chiefly upon the interpretation of the
transaction by the taxpayer, as well as the honesty of the taxpayer. The taxpayer
can, for example, be of the view that the products were physically downloaded
outside the Republic and should therefore not be taxed. Taxpayers can also avoid
taxes by failing to assess the transaction and file the assessment. The selfassessment method is by far the largest contributor to VAT fraud and the erosion of
127
the tax base. The anonymity of e-commerce and the absence of physical evidence of
supplies, can further facilitate the abuse of the self-assessment procedure by
taxpayers. The question is posed whether alternative VAT collection measures
should be explored at all? Will the market for digital imports have a significant impact
on the VAT collection mechanisms that could ultimately lead to the erosion of the tax
base? Based on the findings in paragraph 2.6 above, e-commerce could lead to the
erosion of the tax base in the next 4 to 5 years. Alternative tax collection methods
should be explored before this happens.
In Chapter 4, I examine the VAT treatment of cross-border e-commerce in the
European Union with the aim of seeking possible solutions to the issues raised
above.
CHAPTER 4
THE EUROPEAN UNION
4.1 Introduction
128
The European Union (EU) is an economic and political union 560 consisting of 27
Member States 561 which originated from the European Coal and Steel Community
(established in 1951), 562 and the European Economic Community (established in
1958). 563 The EU has established a single market through the standardisation of
laws that apply to all Member States. EU policies are aimed at the free movement of
people, goods, services, and capital between Member States. 564 Harmonised trade
rules and the use of a single currency (the Euro) in Euro-zone countries ensure
regular and virtually trouble free cross-border trade between Member States. 565
However, the EU VAT model is seriously underminded by numerous exemptions and
derogations of all sorts.
The EU offers a favourable environment for the proliferation of e-commerce. In this
Chapter, I examine the VAT treatment of e-commerce by the harmonised
consumption tax policies applied in the EU. Since VAT as a consumption tax
originated in Europe, I consider it necessary to discuss the history of VAT in the EU.
The purpose of this historical discussion is to highlight the issues associated with the
taxation of e-commerce, and further indicate how EU harmonised consumption tax
rules have developed to address or circumvent these issues. In this discussion I
focus on finding possible solutions in the EU VAT rules that can be applied to the
current issues faced under the South African VAT Act 566 as discussed in Chapter 3.
560
Ginsberg RH (2007) Demystifying the European Union at 2-3.

At the time of writing the 27 Member States consisted of Austria (1995); Belgium (founder); Bulgaria
(2007); Cyprus (2004); Czech Republic (2004); Denmark (1973); Estonia (2004); Finland (1995); France
(founder); Germany (founder); Greece (1981); Hungary (2004); Ireland(1973); Italy(founder); Latvia(2004);
Lithuania (2004); Luxembourg (founder); Malta (2004); Netherlands (founder); Poland (2004); Portugal (1986);
Romania(2007); Slovakia(2004); Slovenia (2004); Spain (1986); Sweden (1995); United Kingdom (1973).
562
Ginsberg RH (2007) Demystifying the European Union at 39-40; Staab A (2008) The European Union
Explained at 8-9.
563
Ginsberg RH (2007) Demystifying the European Union at 40
564
Cameron DR (1992) The 1992 initiative: Causes and Consequences in Sbragia AM (1992) Euro-Politics:
Institutions and Policy Making in the New European Community at 24; European Union How the EU Works
http://europa.eu/about-eu/index_en.htm [accessed on 6 March 2013].
565
The European community evolved from its initial purpose as a purely economic union to an organisation
spanning policy areas from development to human rights, welfare and environmental matters. Everything that
it does stems from treaties that were voluntarily and democratically agreed upon by Member States. These
agreements set out the European Unions goals in all the areas of its activities.
566
Act 89 of 1991.
561
129
4.2 The history of VAT in Europe
VAT is a relatively modern tax that originated in the early twentieth century. Before
VAT was introduced, indirect taxes were limited to certain products like excise on
tobacco and alcohol. 567 In addition to these taxes, very few countries also levied
sales tax or turnover taxes. 568 Most sources differ on the exact year in which VAT
was introduced for the first time in the world. The basic idea of a VAT system can be
attributed to two sources: 569 the writings of the German businessman Wilhelm von
Siemens in 1918, 570 and the writings of the American economist Thomas S Adams
from 1910-1921. 571 Von Siemenss technical innovation brought improvements to
turnover taxes that can today be regarded as some of the key ideas of VAT. 572 As
VAT allows for the recovery of taxes on business inputs, it eliminates the cascading
problems created by turnover taxes. 573 In Adamss case there was no national sales
tax to improve and, unlike von Siemenss technical innovation, he was interested in a
major alteration of the federal tax system. 574
Germany and the rest of Europe saw VAT as a technical alternative to sales tax
which ultimately led to the current widespread implementation of VAT in Europe. 575
By contrast, in the USA VAT has never been introduced, mainly because policy
makers wished to introduce VAT as a substitute for federal income tax. 576 It is
567

569
Ebrill L, Keen M, Bodin JP, Summers V (2001) The Modern VAT at 4; James K (2011) Exploring the Origins
and Global Rise of VAT Tax Analysts at 15; Metcalfe GE (1995) Value Added Taxation: A Tax Whose Time has
Come? The Journal of Economic Perspectives vol 9 nr 1 at 127; Terra BJM and Kajus J (1992) Introduction to
Value Added Tax in the EC after 1992 at 3; Owens JO, Battiau P, Alain C (2011) VATs Next Half Century:
Towards a Single Rate System? OECD Observer no 284 Q 1
http://www.oecdobserver.org/news/fullstory.php/aid/3509/VAT_s_next_half_century:_Towards_a_singlerate_system_.html [accessed on 6 March 2013].
570
Von Siemens CF (1921) Veredelte Umsatzsteuer who cites his brother, Wilhelm von Siemens, as originator
of the proposal.
571
Adams TS (1921) Fundamental Problems of Federal Income Taxation The Quarterly Journal of Economics
vol 35 issue 4 at 527-556.
572
James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 15; Schenk A and Oldman O
(2007) Value Added Tax: A Comparative Approach at 4.
573
Perspectives vol 9 nr 1 at 127-128; ; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach
at 4.
574
575
576
568
130
interesting to note that the USA, in later years, assisted many developing countries
to adopt a VAT system but failed to adopt a VAT system itself. 577 VAT was first
introduced in France in 1948 with limited scope and application. 578 The tax system
was converted to a consumption-type VAT system in 1958. 579 It was not until 1968
that France would implement VAT on a broader spectrum of transactions. 580 In 1967,
Denmark was the first European country to introduce a thoroughbred VAT system,
although it was not a Member State of the then European Community. 581 Denmark
became a member of the European Community in 1973. 582 After Denmark, many
European countries followed by each introducing its own version of VAT systems. 583
The spread of VAT in Europe can, in the main, be attributed to the European Union
Council Directives 584 and the harmonisation of VAT rules. 585 In 1960 the EEC Treaty
tasked the EEC Commission to consider the implementation of a harmonised
consumption tax for Europe. 586 The Commissions report highlighted the cascading
effect of turnover taxes and the limiting effect this has on cross-border trade in a
single market. 587 As a result, the EEC adopted the First Council Directive 588
577
and Global Rise of VAT Tax Analysts at 16; James A (1991) VAT Demystified at 1; Metcalfe GE (1995) Value
Added Taxation: A Tax Whose Time has Come? The Journal of Economic Perspectives vol 9 nr 1 at 128;
Williams D (1998) Value-Added Tax in Thuronyi V (ed) (1998) Tax Law Design and Drafting vol 1 Chapter 6 at
1; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 19.
579
and Global Rise of VAT Tax Analysts at 16; James A (1991) VAT Demystified at 1.
580
581
Analysis at 22; James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 16.
582
Analysis at 22.
583
583
Analysis at 22; James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 16; Ebrill L,
Keen M, Bodin JP, Summers V (2001) The Modern VAT at 5; Metcalfe GE (1995) Value Added Taxation: A Tax
Whose Time has Come? The Journal of Economic Perspectives vol 9 nr 1 at 128.
584
The Council Directives of the EU serve as legislative acts which require Member States to arrive at a specific
outcome or result without dictating the means by which the outcome or result should be achieved. Council
Directives are voluntarily and democratically agreed upon by Member States. The text of a draft directive is
prepared by the Commission after consultation with its own and national experts. The draft is presented to the
Parliament and the Council for evaluation and comment and then for approval or rejection. Council Directives
are binding on the Member State(s) to which they are addressed. The VAT Directives are binding on all 27
Member States.
585
James K (2011) Exploring the Origins and Global Rise of VAT Tax Analysts at 16; Ebrill L, Keen M, Bodin JP,
Summers V (2001) The Modern VAT at 5; Bird RM and Gendron PP (2007) The VAT in Developing and
Transitional Countries at 11.
586
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 3-4.
587
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 4.
578
131
instructing Member States to replace their existing turnover taxes with a common
VAT system based on the consumption of goods and services, by no later than 1
January 1970. 589 The Third, 590 Fourth, 591 and Fifth 592 Directives repeatedly extended
the January 1970 deadline. 593
The First and Second 594 Directives permitted Member States so wide ranging a
discretion, that nine separate and different systems of national laws existed by
1973. 595 National rules in Member States differed dramatically as to when and where
services were deemed to be performed, whether a supply was deemed to be a
supply of goods or services, and whether a supply was exported or imported. 596
As a result, the Sixth Directive 597 was adopted further to harmonise the different
national laws. 598 The new rules introduced by the Sixth Directive cover the areas
where national laws dramatically differed on territorial application, taxable
transactions, place of supply, rates and exemptions, deductions, persons liable to
collect or pay VAT, and vendor registration. 599
588
First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member
States concerning turnover taxes.
589
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 6; Ward BT, Sipior JC,
Bremser W, McGinty DB (2006) A Comparison of United States and European Union Taxation of E-commerce
ICEC '06 Proceedings of the 8th International Conference on Electronic Commerce at 345; Schenk A and
Oldman O (2007) Value Added Tax: A Comparative Approach at 59-60.
590
Third Council Directive 69/463/EEC of 9 December 1969 on the harmonisation of legislation of
Member States concerning turnover taxes - Introduction of value added tax in Member States.
591
Fourth Council Directive 71/401/EEC of 20 December 1971 on the harmonization of the laws of the Member
States relating to turnover taxes - Introduction of value added tax in Italy.
592
Fifth Council Directive 72/250/EEC of 4 July 1972 on the harmonisation of legislation of Member
States concerning turnover taxes Introduction of value added tax in Italy.
593
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 6-7.
594
Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States
concerning turnover taxes - Structure and procedures for application of the common system of value added
tax.
595
Ward BT, Sipior JC, Bremser W, McGinty DB (2006) A Comparison of United States and European Union
Taxation of E-commerce ICEC 06 Proceedings of the 8th International Conference on Electronic Commerce at
345.
596
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 8.
597
Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States
relating to turnover taxes - Common system of value added tax: uniform basis of assessment.
598
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 8; Ward BT, Sipior JC,
Bremser W, McGinty DB (2006) A Comparison of United States and European Union Taxation of E-commerce
ICEC 06 Proceedings of the 8th International Conference on Electronic Commerce at 345; Doernberg R and
Hinnekens L (1999) Electronic Commerce and International Taxation 27-33.
599
Terra BJM and Kajus J (1992) Introduction to Value Added Tax in the EC after 1992 at 9
132
When the Sixth Directive was implemented, e-commerce was unheard of and the
rules were designed to fit the retail trends common to that era. 600 With the advent of
e-commerce, many non-EU suppliers were able to circumvent the application of VAT
on supplies made in the EU, placing these suppliers at an advantage over EU
vendors whose supplies were subject to VAT in Member States. 601 It was feared that
consumption patterns would be distorted which would further induce EU vendors to
establish their e-commerce enterprises in VAT-free countries to retain their market
share. 602 This forced the EU to review and amend the VAT legislative base to take
account of greater international collaboration. 603 In collaboration with the OECD, the
EU adopted a set of guidelines in 1998 and the first true attempt to finalise a solution
was published in the Proposal for a Council Directive amending Directive
77/388/EEC as regards the value added tax arrangements applicable to certain
services supplied by electronic mean. 604 This proposal was not well supported and
was replaced by the proposal of 7 May 2002 which contained many of the basic
objectives of the June 2000 proposal. 605
The first amendment to the Sixth Directive to provide for the taxation of cross-border
e-commerce transactions, and to eliminate the competitive disadvantages created by
the Sixth Directive, came in the form of Council Directive 2002/38/EC 606 adopted on
7 May 2002. This was followed by Council Directive 2006/58/EC, 607 Council Directive
600
Van der Merwe B (2004) VAT in the European Union and Electronically Supplied Services to Final
Consumers 16 SA Merc LJ at 577.
601
602
Consumers 16 SA Merc LJ at 578-579; Doernberg RL, Hinnekens L, Hellerstein W, Li J (2001) Electronic
Commerce and Multi-jurisdictional Taxation at 429-430.
603
Interim Report on the implications of electronic commerce on VAT and Customs 98/0359, 3/4/98
http://ec.europa.eu/taxation_customs/resources/documents/interim_report_on_electric_commerce_en.pdf
604
Proposal for a Council Directive amending Directive 77/388/EEC as regards the value added tax
arrangements applicable to certain services supplied by electronic mean COM (2000) 349 Final http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2000:0349:FIN:en:PDF [accessed on 3 October 2012].
605
606
Council Directive 2002/38/EC of 7 May 2002.
607
Council Directive 2006/58/EC of 27 June 2006.
133
2006/138/EC, 608
Council
Directive
2006/112/EC, 609
and
Council
Directive
2008/8/EC. 610
Member States are obliged to follow EC law and ensure that harmonised rules are
correctly applied on a national level. 611 Despite a harmonised tax base, differences
in national VAT legislation exist between Member States in respect of rates and
exemptions. 612 To determine the exact tax treatment of the supply of digital products
in a particular jurisdiction, several questions need to be answered:
a) Is there a supply of goods or services?
b) Where is the supply made?
c) When is the supply made?
d) What is the value of the supply?
e) Is it made by a taxable entity?
f) Is it made in the course or furtherance of an enterprise?
g) Is the supply taxable?
h) How is VAT on the transaction collected?
4.3 The VAT treatment of e-commerce in the EU

Where tangible goods are ordered electronically by private consumers, and where
these goods are delivered by traditional means, existing rules in respect of distance
selling (telephone or postal orders) apply. 613 There are well-established channels in
608
Council Directive 2006/138/EC of 19 December 2006.

Council Directive 2006/112/EC of 28 November 2006.
610
Council Directive 2008/8/EC of 12 February 2008.
611
Rendahl P (2007) An Overview of Consumption Tax Implications on Sale of Digital Downloads in the
European Union Journal of Media Business Studies vol 4 no 2 at 65.
612
613
arrangements applicable to certain services supplied by electronic mean COM (2000) 349 Final at 3 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2000:0349:FIN:en:PDF [accessed on 3 October 2012];
Jenkins P (2000) The EU Proposals for the Effective Application of VAT in the Internet Age Tax Planning
609
134
the Sixth Directive to tax these transactions adequately. However, problems occur
when intangible goods are ordered and delivered electronically.
Uncertainty with regard to the classification of supplies causes difficulties for the
supplier who is required to levy and account for VAT on cross-border digital
transactions. 614 It is likely to increase the administrative burden on suppliers and
may have an adverse economic effect on these companies. 615 Ideally, suppliers
should be able to classify supplies without difficulty to ensure smooth and fast crossborder trade.
Article 5(1) of the Sixth Directive defines the supply of goods as the transfer of the
right to dispose of tangible property as the owner. Electricity, gas, heat,
refrigeration, and the like are regarded as tangible property. 616
As a result of the intangible nature of digital supplies, they cannot be classified as
goods. It has, however, been argued that digital supplies require some form of
electrical current, and could accordingly be classified as goods if a strict textual
interpretation of the definition of goods is applied. 617 This argument should not be
accepted. 618 Electricity is traditionally classified as goods because authorities have
greater control over its supply, unlike electronic deliveries. 619
Article 6 of Sixth Directive defines the supply of services as any transaction which
does not constitute a supply of goods within the meaning of Article 5. Similar to the
meaning of services under the South African VAT Act, 620 the meaning of services
envisaged in the Sixth Directive allows for a wide scope of application. Digital
products should, therefore, by default, be classified as services. On 17 June 1998,
International E-commerce vol 2 no 12 at 3; Fairpo CA (1999) "VAT in the European Union-Where are we now"
Tax Planning International E-commerce vol 1 no 9 at 17; Jeanmart FX (2001) Taxation of Electronic Commerce
Part II:VAT Tax Planning International: European Union Focus vol 3 no 8 at 6; Garca AMD and Cuello RO
(2011) Electronic Commerce and Indirect Taxation in Spain European Taxation vol 51 no 4 at 140.
614
Rendahl P (2008) Cross-Border Consumption Taxation of Digital Supplies at 167.
615
616
Article 5(2) Sixth Council Directive 77/388/EEC of 17 May 1977.
617
Hargitai C (2001) Value added Taxation of Electronic Supply of Services Part III at 2
http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8 October 2012].
618
619
620
135
the European Commission issued a set of guidelines in terms of which the EU policy
on indirect taxes on e-commerce is set out. 621 In terms of these guidelines, it is a
policy of the EU to consider products ordered and delivered on networks as
services. 622 This means that all types of electronic transmission and all types of
intangible product delivered by electronic transmission, are deemed to be services
for EU VAT purposes. 623
In contrast to the South African position, the taxation of the supply of goods and that
of services differ in EU Member States. As e-commerce is a global phenomenon,
Van der Merwes question whether a differentiation between goods and services is at
all necessary in jurisdictions where goods and services are taxed at a single rate,
becomes irrelevant. 624 While a differentiation could be obsolete on a national level,
trade with jurisdictions where differentiation is actively applied could cause market
distortions. 625 Jurisdictions acting in isolation cannot resolve all the issues raised by
e-commerce. As a result, a uniform global approach should be followed in the
classification of digital products.
Article 1(a) of Council Directive 2002/38/EC, 626 amended Article 9(2)(e) of the Sixth
Directive to provide for the inclusion of electronically supplied services in the
definition of services. In addition, Annexure L to Council Directive 2002/38/EC, lists
types of transaction that would be deemed to be electronically supplied services. It
should be noted that transactions covered by the provision governing electronically
supplied services, are not restricted to the services listed in Annexure L. These
services are the:
621
Electronic Commerce and Indirect Taxes COM (1998) 374 final http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:1998:0374:FIN:EN:PDF [accessed on 4 October 2012].
622
Electronic Commerce and Indirect Taxes COM (1998) 374 final at 5 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:1998:0374:FIN:EN:PDF [accessed on 4 October 2012].
623
Electronic Commerce and Indirect Taxes COM (1998) 374 final at 5 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:1998:0374:FIN:EN:PDF [accessed on 4 October 2012];
Henriques V, Azevedo L, Bonnet J, Carvalho P, Mathan L (2001) Extending VAT to E-commerce: An
Implementation of EU Proposals Euroweb 2001 at para 2.4.
624
Van der Merwe B (2003) VAT and E-commerce 15 SA Merc LJ at 381.
625
Imports from countries that apply a lower VAT rate for the intangible version of its tangible equivalent
could flood local markets at the cost of local suppliers. Similarly, international trade with existing suppliers
could be abandoned in favour of suppliers located in low VAT jurisdictions.
626
Council Directive 2002/38/EC of 7 May 2002.
136
1. website supply, web-hosting, distance maintenance of programmes and

equipment; 627
2. supply and updating of software; 628
3. supply of images, text, and information, and making databases available; 629
4. supply of music, films, and games, including games of chance and gambling
games, and of political, cultural, artistic, sporting, scientific, and entertainment
broadcasts and events; 630
5. supply of distance teaching. 631
627
Annexure 1 to the Council Regulation of 17 October 2005 further defines item 1 as:
(a) Website hosting and webpage hosting;
(b) Automated, online and distance maintenance of programmes;
(c) Remote systems administration;
(d) Online data warehousing where specific data is stored and retrieved electronically;
(e) Online supply of on-demand disc space.
628
(a) Accessing or downloading software (including procurement/accountancy programmes and
anti-virus software) plus updates;
(b) Software to block banner adverts showing, otherwise known as Bannerblockers;
(c) Download drivers, such as software that interfaces computers with peripheral equipment
(such as printers);
(d) Online automated installation of filters on websites;
(e) Online automated installation of firewalls.
629
(a) Accessing or downloading desktop themes;
(b) Accessing or downloading photographic or pictorial images or screensavers;
(c) The digitised content of books and other electronic publications;
(d) Subscription to online newspapers and journals;
(e) Weblogs and website statistics;
(f) Online news, traffic information and weather reports;
(g) Online information generated automatically by software from specific data input by the
customer, such as legal and financial data, (in particular such data as continually updated stock
market data, in real time);
(h) The provision of advertising space including banner ads on a website/webpage;
(i) Use of search engines and Internet directories.
630
(a) Accessing or downloading of music on to computers and mobile phones;
(b) Accessing or downloading of jingles, excerpts, ringtones, or other sounds;
(c) Accessing or downloading of films;
(d) Downloading of music on to computers and mobile phones;
(e) Accessing automated online games which are dependent on the Internet, or other similar
electronic networks, where players are geographically remote from one another.
631
(a) Automated distance teaching dependent on the Internet or similar electronic network to function
and the supply of which requires limited or no human intervention, including virtual classrooms,
except where the Internet or similar electronic network is used as a tool simply for communication
between the teacher and student;
(b) Workbooks completed by pupils online and marked automatically, without human intervention.
137
This list is incorporated in the re-cast version of the EU VAT Directives under Annex
II of Council Directive 2006/112/EC, and its later amendment by Council Directive
2008/8/EC. The guidelines further defining the items in the list as envisaged by
Annexure 1 of the Council Regulation of 17 October 2005, are re-cast in Annexure I
of Council Implemented Regulations (EU) no 282/2011.
The mere fact that the supplier and the recipient communicated by electronic means,
does not mean that the transactions or the goods will be regarded as electronically
supplied services. 632 However, where the supplier has created a portal providing
relevant information to its clients at a subscription fee, the services would qualify as
electronically supplied services. 633
As a result of the evolving nature of e-commerce and technology, electronically
supplied services should, at best, not be defined to result in a restrictive meaning or
a meaning that would result in limited application. 634 It is trite that technological
changes are far more advanced and frequent than legislative amendments. It often
happens that by the time legislative amendments have been incorporated,
technology has already advanced to render the amendments obsolete. 635 Save for
the types of supply listed in Annexure L, Council Directive 2002/38/EC does not
provide a general definition of what constitute electronically supplied services. 636 In
reiterating that electronically supplied services are not limited to the services listed in
Annexure L, the Council Regulation of 17 October 2005 637 provides for a general
definition of electronically supplied services. Article 11 of the Council Regulation of
17 October 2005, defines electronically supplied services as:
632
Annexure L to Council Directive 2002/38/EC of 7 May 2002; also see Bill S and Kerrigan A (2003) Practical
Application of European Value Added Tax to E-commerce Georgia Law Review 38 no 1 at 76.
633
Lejeune I, Korf R, Grnauer A (2003) New E-commerce Directives: A Move Towards e-Europe? Journal of
International Taxation vol 14 no 4 at 20.
634
Electronic Commerce and Indirect Taxes COM (1998) 374 final at 3 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:1998:0374:FIN:EN:PDF [accessed on 4 October 2012];
Fridenskld E (2004) VAT and the Internet: The Application of Consumption Taxes to E-commerce
Transactions Information & Communications Technology Law vol 13 no 2 at 184; De Campos Amorim J (2009)
"Electronic Commerce Taxation in the European Union" Tax Notes International vol 55 no 9 at 774; Hinnekens
L (2002) "An Updated Overview of the European VAT Rules Concerning Electronic Commerce" EC Tax Review
vol 11 issue 2 at 69.
635
Baron R (2001) VAT- Where Next for Europe? Tax Planning International E-commerce vol 3 no 1 at 12.
636
637
Council Regulation (EC) 1777/2005 of 17 October 2005 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:288:0001:0009:EN:PDF [accessed on 4 October 2012].
138
...services which are delivered over the Internet or an electronic network and the nature of
which renders their supply essentially automated and involving minimal human
intervention, and in the absence of information technology is impossible to ensure.
A definition in these general terms can be applied to cover all types of electronically
supplied service, irrespective of the type of service and the technological delivery
method used. It would be difficult to circumvent the application of article 9(2)(e)
under the general definition. To further eliminate possible circumvention, the words
Indicative list were added to the heading of the list in Annexure II by Council
Directive 2008/8/EC and have applied since 1 January 2010.
The tax consequence of electronically supplied services differs from that of other
services. 638 It is therefore not sufficient (when dealing with customers in the EU) to
classify digital products as services based on a blanket classification method. The
specific digital product should further be classified to determine if it is taxable under
the provisions governing electronically supplied services, or any other provision. 639 A
general broad definition of electronically supplied services could complicate the
classification by vendors. The Council Regulation of 17 October 2005 provides for a
list of services that would qualify as electronically supplied services, 640 and a list of
services that would not qualify as such. 641 Rendahl opines that these guidelines,
638
639
640
(a) the supply of digitised products generally, including software and changes to or upgrades of
software;
(b) services providing or supporting a business or personal presence on an electronic network such
as a website or a webpage;
(c) services automatically generated from a computer via the Internet or an electronic network, in
response to specific data input by the recipient;
(d) the transfer for consideration of the right to put goods or services up for sale on an Internet site
operating as an online market on which potential buyers make their bids by an automated procedure
and on which the parties are notified of a sale by electronic mail automatically generated from a
computer;
(e) Internet Service Packages (ISP) of information in which the telecommunications component forms
an ancillary and subordinate part (i.e. packages going beyond mere Internet access and including
other elements such as content pages giving access to news, weather or travel reports, playgrounds,
website hosting; access to online debates etc.);
(f) the services listed in Annex I.
641
1. radio and television broadcasting services as referred to in the 11th indent of Article 9(2)(e) of
Directive 77/388/EEC;
th
2. telecommunications services, within the meaning of the 10 indent of Article 9(2)(e) of Directive
77/388/EEC;
3. supplies of the following goods and services:
139
despite their extensive nature, are already obsolete in certain cases, and cannot be
applied to correctly classify the type of service rendered. 642 As a result of the
dynamic evolution of the Internet and e-commerce, many transactions that should in
principle be taxed, escape the application of VAT as a direct consequence of the
unsatisfactory list of electronically supplied services. 643 In the case of combined or
bundled services, the general definition of electronically supplied services is
inadequate to classify the type of services correctly. Furthermore, where the specific
service is not provided for by specific inclusions, different views and applications of
the classification between Member States can develop. 644 This can best be
explained by way of example.
Example 4.1: X plays a trial online video game in which X creates a
character that has to complete a quest in a modern city. As part of the
graphics, streets are lined with billboards with real-life advertisements. Any
(a) goods, where the order and processing is done electronically;
(b) CD-ROMs, floppy disks and similar tangible media;
(c) printed matter, such as books, newsletters, newspapers
or journals;
(d) CDs, audio cassettes;
(e) video cassettes, DVDs;
(f) games on a CD-ROM;
(g) services of professionals such as lawyers and financial consultants, who advise clients by e-mail;
(h) teaching services, where the course content is delivered by a teacher over the Internet or an
electronic network, (namely via a remote link);
(i) offline physical repair services of computer equipment;
(j) offline data warehousing services;
(k) advertising services, in particular as in newspapers, on posters and on television;
(l) telephone helpdesk services;
(m) teaching services purely involving correspondence courses, such as postal courses;
(n) conventional auctioneers services reliant on direct human intervention, irrespective of how bids
are made;
(o) telephone services with a video component, otherwise known as videophone services;
(p) access to the Internet and World Wide Web;
(q) telephone services provided through the Internet.
642
643
Basu S (2002) European VAT on Digital Sales Journal of Information, Law and Technology issue 3
http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October 2012]; Hinnekens L (2002) "An Updated
Overview of the European VAT Rules Concerning Electronic Commerce" EC Tax Review vol 11 issue 2 at 71;
Buydens S, Holmes D, Owens J (2009) Consumption Taxation of E-commerce: 10 Years after Ottawa Tax
Notes International vol 54 no 1 at 63.
644
European Union Journal of Media Business Studies vol 4 no 2 at 72; Parrilli DM (2009) Electronically Supplied
Services and Value Added Tax: The European Perspective Journal of Internet Banking and Commerce vol 14
no 2 at 8; Buydens S, Holmes D, Owens J (2009) Consumption Taxation of E-commerce: 10 Years after
Ottawa Tax Notes International vol 54 no 1 at 63; De la Feria R (2006) The EU VAT System and the Internal
Market at 110.
140
player can click on the advertisement to be linked to the advertisers

webpage. X purchases the executive gaming package which allows him to
play all the online levels which includes free advertising space for 10
virtual billboards per level.
In this case the supply of the online gaming facility can be classified as electronically
supplied services. 645 However, it is uncertain whether the sale of advertising space
amounts to electronically supplied services, 646 or if it is specifically excluded from the
definition of electronically supplied services. 647 Where the game itself is not hosted
on a webpage but requires an Internet connection to be played, it could be argued
that the advertising space falls under article 12(6), and should not be classified as
electronically supplied services. Where the game is played by logging into a website,
the advertising space falls under item 3(h) of Annex I and should be classified as
electronically supplied services. Despite the difference in the distribution method,
where the fundamental nature of the product is the same, the online and offline
versions should be taxed the same. 648 This is currently not the case in Member
States. Rendahl points out that the immediate difference between advertising
services and pop-ups or banners, lies in the fact that the latter is the provision of
advertising space as oppose to the supply of advertising services. 649 Even so, the
difference cannot easily be determined and each case must be evaluated in its own
right. 650
Businesses, tax authorities and courts stand before rules that allow for multifarious
interpretation and application. For example, traditional services rendered by
attorneys and accountants are excluded from electronically supplied services
because of the human intervention required to provide these services. Where
technology, such as automated responses or self-help calculators, is applied, these
traditional services require minimal human intervention and could be classified as
645
Item 4(e) of Annex I to the Regulations of 17 October 2005.

Item 3(h) of Annex I to the Regulations of 17 October 2005.
647
Article 12(6) of the Regulations of 17 October 2005.
648
Transactions Information & Communications Technology Law vol 13 no 2 at 184; Jones R and Basu S (2002)
Taxation of Electronic Commerce: A Developing Problem International Review of Law, Computers &
Technology vol 16 no 1 at 37.
649
650
646
141
electronically supplied services under the general definition. 651 Suppliers could
effectively be taxed differently depending on the interpretation in the jurisdiction of
supply. 652 In the example provided by Rendahl, she points out that the supply of
generic building plans, which require minimum human intervention and which do not
relate to specific immovable property, can be classified as either services related to
immovable property, 653 or as electronically supplied services. 654 This results in
alternating place-of-supply rules. Currently, suppliers are obliged to familiarise
themselves with national rules and to develop and apply software that determines
the jurisdiction of supply. This allows them to tax the supply correctly at the
applicable rate. There is a clear risk of double taxation or failure to tax if supplies are
taxed differently on the basis of differing applications in Member States. 655 Until 31
December 2014, in the case of supplies between EU suppliers and EU customers
located in different Member States, the supplier has only to establish the VAT
treatment of the supply in the country of origin. 656 From 1 January 2015 when the
destination principle will apply to these transactions, the supplier will have to
establish the VAT treatment of the supply in 28 657 different Member States. 658
These definitional uncertainties create the risk of divergent application and increase
the risk of double or non-taxation. 659 Fridenskld suggests that further guidance in
the form of definitions and classifications, is required on a regular basis to guarantee
651
Directorate-General for Internal Policies (2012) Simplifying and Modernising in the Digital Single Market at
46
http://www.europarl.europa.eu/document/activities/cont/201209/20120924ATT52130/20120924ATT52130E
N.pdf [accessed on 15 October 2012].
652
European Union Journal of Media Business Studies vol 4 no 2 at 73; Eriksen N and Hulsebos K (2000)
"Electronic Commerce and VAT-An Odyssey towards 2001" International VAT Monitor vol 11 no 4 at 143.
653
Article 45 read with article 9(2) of the Sixth Council Directive 77/388/EC.
654
Rendahl P (2008) Cross-Border Consumption Taxation of Digital Supplies at 189-190.
655
656
See place-of-supply rules in para 4.3.2 below.
657
Crotia joined the EU on 1 July 2013.
658
46
659
Doernberg RL, Hinnekens L, Hellerstein W, Li J (2001) Electronic Commerce and Multi-jurisdictional Taxation
at 114; Buydens S, Holmes D, Owens J (2009) Consumption Taxation of E-commerce: 10 Years after Ottawa
Tax Notes International vol 54 no 1 at 63.
142
clarity and certainty. 660 Whether this approach is desirable may be questioned given
the fast pace at which e-commerce and technology evolve. Bill and Kerrigan argue
that the less than definitive list in itself allows for alternative interpretation once ecommerce evolves beyond the scope it offers. 661 They further argue that greater
certainty is not achieved through extensive legislation, but rather through explanatory
guidelines. 662 These guidelines are not subject to the long and complex legislative
process and can be amended with greater ease. It should, however, be noted that
guidelines do not share the same hierarchical binding nature as legislation, and can
at best be applied as soft law. 663 Guidelines are in particular required for combined
or bundled services where the combined services are difficult to separate, as was
explained in example 4.1 above. 664 The general guidelines currently in place suggest
a two-stage test to determine if a supply constitutes an electronically supplied
service: 665
i) The service must be delivered over the Internet or an electronic network.
Therefore, the service is reliant on the Internet or similar network for its provision. 666
660
Transactions Information & Communications Technology Law vol 13 no 2 at 184-185.
661
Bill S and Kerrigan A (2003) Practical Application of European Value Added Tax to E-commerce Georgia
Law Review 38 no 1 at 76.
662
Law Review 38 no 1 at 76; also see Value Added Tax Committee, EC, VAT Information Sheet 04/03,
Electronically Supplied Services: A Guide to Interpretation
http://webarchive.nationalarchives.gov.uk/20120128212010/http:/customs.hmrc.gov.uk/channelsPortalWeb
App/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&prope
rtyType=document&columns=1&id=HMCE_CL_000907 [accessed on 8 October 2012].
663
Brandt U and Juul M (2005) EU VAT Rules on Electronically Supplied Services Tax Planning International:
European Union Focus vol 7 nr 10 at 13.
664
Jones R and Basu S (2002) Taxation of Electronic Commerce: A Developing Problem International Review
of Law, Computers & Technology vol 16 no 1 at 37.
665
Value Added Tax Committee, EC, VAT Information Sheet 04/03, Electronically Supplied Services: A Guide to
Interpretation
rtyType=document&columns=1&id=HMCE_CL_000907 [accessed on 8 October 2012]; also see Bill S and
Kerrigan A (2003) Practical Application of European Value Added Tax to E-commerce Georgia Law Review 38
no 1 at 76; Ward BT, Sipior JC, Bremser W, McGinty DB (2006) A Comparison of United States and European
Union Taxation of E-commerce ICEC 06 Proceedings of the 8th International Conference on Electronic
Commerce at 347.
666
Interpretation
143
ii) The nature of the service is dependent on information technology for its supply.
The service is essentially automated and involves little human intervention. Without
information technology the service would not be viable. 667
The two-stage test does not provide a clear outcome in all cases. In applying it to
example 4.1, it could be argued that the service requires an initial network
connection but is not dependent on a constant connection. The two-stage test does
not state whether a constant network connection is required. As technology evolves,
suppliers, tax authorities, and the courts would find it increasingly difficult to identify
the type of supply correctly. In other terms, the current position that allows for
various interpretations of what constitutes electronically supplied services, is not
excluded by the two-stage test.
Place-of-supply rules are designed to assign a taxing jurisdiction in cross-border

trade. The Sixth Directive addresses this through the implementation of a dual placeof-supply regime. 668 The place of taxation in respect of goods is determined by the
physical location of the goods, irrespective of where the parties reside. 669 In the case
Commerce at 347; Parrilli DM (2009) Electronically Supplied Services and Value Added Tax: The European
Perspective Journal of Internet Banking and Commerce vol 14 no 2 at 6.
667
Interpretation
Commerce at 347; Parrilli DM (2009) Electronically Supplied Services and Value Added Tax: The European
Perspective Journal of Internet Banking and Commerce vol 14 no 2 at 6.
668
Hargitai C (2001) Value added Taxation of Electronic Supply of Services Part II at 3
669
Article 8 of the Sixth Directive 77/388/EEC of 17 May 1977; also see Hargitai C (2001) Value added Taxation
of Electronic Supply of Services Part II at 3
144
of services it is often difficult to determine a physical location, and it often requires

fictitious place-of-supply rules (proxies) to determine a tangible location. 670
In 1996 the European Commission proposed the introduction of a common VAT
system based on the origin tax principle. 671 It was believed that the cost of
administering taxes in a foreign jurisdiction was between five and six times higher for
similar transactions conducted in the suppliers home country. 672 An origin-based
taxation model would do away with costly administration, multiple registrations, and
burdensome/cumbersome procedures. 673 However, the implementation of an originbased taxation model requires significant fundamental changes that are not easily
realised:
i) given the elasticity and sensitivity of international electronic trade, 674 further
standardisation of VAT rates, possibly into a single rate, would be required; 675
ii) a uniform application which would require the VAT Committee to transform
from an advisory body into a regulatory body; 676
iii) the re-allocation of displaced VAT revenues between Member States to
guarantee the same level of current revenue. 677
Tax neutrality cannot be ensured by an origin-based taxation model. This was
evident from the fact that many European telecommunication companies moved to
non-European countries with the intention to avoid VAT, both in and outside of the
EU, when the origin-based tax model was introduced for telecommunication services
in the EU. 678
670

http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8 October 2012];
Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 209; Millar R (2008)
Jurisdictional Reach of VAT in Krever R (ed) (2008) VAT in Africa at 177, 180.
671
Doernberg R and Hinnekens L (1999) Electronic Commerce and International Taxation at 346.
672
673
674
Ligthart JE (2004) Consumption Taxation in a Digital World: A Primer CentER Discussion Paper no 2004102 at 14 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=625044 [accessed on 28 November 2012].
675
676
677
678
Doernberg R and Hinnekens L (1999) Electronic Commerce and International Taxation at 347; Hinnekens L
(2002) "An Updated Overview of the European VAT Rules Concerning Electronic Commerce" EC Tax Review vol
11 issue 2 at 67.
145
As a result, the European Commission endorsed the destination-based tax model in

1998 to ensure that:
- services, whether supplied via e-commerce or otherwise, which are supplied for
consumption within the EU, are taxed within the EU, whatever their origin.
- such services, supplied by EU operators for consumption outside the EU, are not
subject to VAT in the EU, but VAT on related inputs is eligible for deduction.
679
These guidelines do not rule out the application of different rules within the EU in
accordance with the European Commissions commitment to a common destination
based VAT system. 680 The place-of-supply rules in respect of electronically supplied
services can best be explained by a chronological discussion of the introduction of
proxies by the various Council Directives adopted after the implementation of the
general rule under the Sixth Directive.
4.3.2.1 Place of supply under the Sixth Directive
Generally, the place of supply in the case of services is the place where the supplier
has established his business, or has a fixed establishment from which the services
are supplied. 681 In the absence of a fixed place of business or establishment, the
place where the supplier has its permanent address or where it usually resides, will
be deemed to be the place of supply. 682 For administrative purposes, the Sixth
Directive provides that the place-of-supply rules may differ in accordance with the
type of supply. 683 These rules are contained in the exceptions to the general placeof-supply rules as listed in article 9(2). Locating the place of supply where the
679
European Commission (1998) E-commerce and Indirect Taxation at 6 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:1998:0374:FIN:EN:PDF [accessed on 17 January 2013].
680
681
Article 9(1) of the Sixth Directive 77/388/EEC of 17 May 1977.
682
Article 9(1) of the Sixth Directive 77/388/EEC of 17 May 1977.
683
146
exceptions are applicable, is complex and difficult to apply. 684 In addition, these rules
are not consistently applied by Member States. 685
The general rule, based on the origin principle, is designed to tax B2C and B2B
transactions on a national level. 686 It is further based on the assumption that, due to
technical limitations, the supply and consumption of services normally takes place
within a single country. 687 In other words, the supplier, recipient and consumption are
all located in the same jurisdiction. 688 Where the general rule is primarily designed to
tax consumption on a national level, the possible cross-border supply of services is
taxed in terms of special supply rules provided for in article 9(2). 689 These special
place-of-supply rules can, however, only be applied to services specifically listed as
such. 690 If the transaction in question is not provided for in the lex specialis, it
naturally falls within the scope of article 9(1) - the general rule. 691
The application of the general provision in article 9(1) to electronic deliveries, has
resulted in a number of undesirable consequences. The first of these appeared
within the EU. Taxing supplies at the origin, led to the misallocation of VAT revenues
among Member States, and further created the potential to distort consumer
patterns. 692 As a result of the absence of border control measures in the case of
684
Williams D (1998) Value-Added Tax in Thuronyi V (ed) (1998) Tax Law Design and Drafting vol 1 Chapter
6 at 31 fn 85.
685
Williams D (1998) Value-Added Tax in Thuronyi V (ed) (1998) Tax Law Design and Drafting vol 1 Chapter 6
at 31 fn 85.
686
http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8 October 2012]; Wille
P (2000) Electronic Commerce and VAT burdens CESifo Forum vol 1 issue 3 at 23
http://econpapers.repec.org/article/cesifofor/v_3a1_3ay_3a2000_3ai_3a3_3ap_3a17-23.htm [accessed on 11
October 2012].
687
688
689
http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8 October 2012];
Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 213;
690
http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8 October 2012]; Millar
R (2008) Jurisdictional Reach of VAT in Krever R (ed) (2008) VAT in Africa at 214.
691
Dudda v Finanzamt Bergisch Gladbach Case C-327/94 (1996) ECR I-04595 at para 21; Van Doesum A, Van
Kesteren H, van Norden GJ, Reiners I (2008) The New Rules on the Place of Supply of Services in European
VAT EC Tax Review vol17 issue 2 at 79.
692
Consumers 16 SA Merc LJ at 578; Hargitai C (2001) Value added Taxation of Electronic Supply of Services Part
147
electronic deliveries, consumers can choose to buy in jurisdictions with the lowest
VAT rate.
The second undesirable outcome of the origin principle, arose in the international
arena. In the case of internationally imported electronic deliveries, the general rule
provides that the place of supply is deemed to be outside of the EU. 693 Supplies of
these products to businesses or consumers within the EU are not taxable under the
Sixth Directive. 694 If the country of origin does not have a VAT system, or applies the
destination principle, these supplies would remain untaxed. Outbound international
supplies of the same services are, however, taxable under article 9(1). 695
This created the potential for major market distortions where European suppliers,
which are subject to EU VAT, compete against foreign suppliers which escape the
tax net. 696 It further potentially distorts transaction patterns because European
II at 5 http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8 October 2012];

Jones R and Basu S (2002) Taxation of Electronic Commerce: A Developing Problem International Review of
Law, Computers & Technology vol 16 no 1 at 46; Harley G (1999) "VAT and the Digital Economy: How Can VAT
Evolve to Meet the Challenges of E-commerce" Tax Planning International E-commerce vol 1 no 10 at 11;
Bouwhuis PA (2002)E-commerce; Het Einde van de BTW? Weekblad Fiscale Recht vol131 no 6471 at 345;
European Union Focus vol 7 no 10 at 13; Lambourne M (2005) On the Horizon: New EU VAT Place of Supply
Rules for Services Tax Planning International: European Union Focus vol 7 no 1 at 13; Schenk A and Oldman O
(2007) Value Added Tax: A Comparative Approach at 211.
693
Consumers SA Merc LJ vol 16 no 4 at 578; Hargitai C (2001) Value added Taxation of Electronic Supply of
Services Part II at 5 http://centers.law.nyu.edu/jeanmonnet/archive/papers/01/013301.html [accessed on 8
October 2012]; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 211.
694
arrangements applicable to certain services supplied by electronic mean COM (2000) 349 Final at 6 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2000:0349:FIN:en:PDF [accessed on 3 October 2012]; Van
der Merwe B (2004) VAT in the European Union and Electronically Supplied Services to Final Consumers SA
Merc LJ vol 16 no 4 at 578; Hargitai C (2001) Value added Taxation of Electronic Supply of Services Part II at 5
695
arrangements applicable to certain services supplied by electronic means COM (2000) 349 final at 6 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2000:0349:FIN:en:PDF [accessed on 3 October 2012]; Van
der Merwe B (2004) VAT in the European Union and Electronically Supplied Services to Final Consumers SA
Merc LJ vol 16 no 4 at 578; Hargitai C (2001) Value added Taxation of Electronic Supply of Services Part II at 5
696
Bleuel J and Stewen M (2000) Value Added Taxes on Electronic Commerce: Obstacles to the EU
Commissions Approach Intereconomics July/August at 155; Jensen P (2004) VAT Levied on Digital Sales
within EU International Tax Journal vol 30 no 1 at 2; Harley G (1999) "VAT and the Digital Economy: How Can
VAT Evolve to Meet the Challenges of E-commerce" Tax Planning International E-commerce vol 1 no 10 at 11;
Fairpo CA (1999) "VAT in the European Union-Where are we now" Tax Planning International E-commerce vol
1 no 9 at 18; Bouwhuis PA (2002)E-commerce; Het Einde van de BTW? Weekblad Fiscale Recht vol131 no
6471 at 345; Jeanmart FX (2001) Taxation of Electronic Commerce Part II:VAT Tax Planning International:
148
suppliers are forced to establish a presence in a foreign jurisdiction to retain

competitiveness. 697 For example, a supplier of digital products from the USA would
not levy VAT on supplies made to European residents, while a supplier from Europe
is required to levy VAT on supplies made to residents of the USA. 698
In order to avoid double taxation, non-taxation, or the distortion of competition,
Member States could consider the place of supply to be the place where the
effective use and enjoyment of the services takes place - if that place of consumption
is outside the European Community. 699 This provision is similar to the phrase
utilised and consumed within the Republic in the definition of imported services in
the South African VAT Act. 700 The difference lies in the application. In terms of the
South African VAT Act, 701 exports are zero-rated by default. 702 The phrase utilised
and consumed in the Republic is used to escape VAT on imported services where
the taxpayer is of the view that the services were enjoyed outside of the Republic. In
contrast, article 9(3) of the Sixth Directive is applied to exempt exported services
from EU VAT in order to place the EU supplier on economic par with its international
counterparts.
For example, article 9(3) was incorporated in the Umsatzsteuergesetz703 (the
German VAT Act) providing for the exemption of exported goods and services from
VAT. Since the general place-of-supply rule in terms of article 9(1), applied to
imported services, German suppliers exported digital products to a business partner
European Union Focus vol 3 no 8 at 6; Brandt U and Juul M (2005) EU VAT Rules on Electronically Supplied
Services Tax Planning International: European Union Focus vol 7 nr 10 at 13; Lejeune I, Korf R, Grnauer A
(2003) New E-commerce Directives: A Move Towards e-Europe? Journal of International Taxation vol 14 no 4
at 20; Garca AMD and Cuello RO (2011) Electronic Commerce and Indirect Taxation in Spain European
Taxation vol 51 no 4 at 137.
697
698
Basu S (2002) European VAT on Digital Sales The Journal of Information, Law and Technology vol 3
http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October 2012]; Merrill PR (2001) The Moving
Target of E-commerce The CPA Journal November at 32.
699
Article 9(3) of the Sixth Directive 77/388/EEC.
700
701
Act 89 of 1991.
702
See zero rating provisions in general in section 11 of the VAT Act 89 of 1991.
703
Umsatzsteuergesetz 1999.
149
in the USA and then re-imported the products to escape VAT. 704 This was essentially
a domestic supply that was electronically routed to the consumer via the USA.
It is interesting to note that, prior to Council Directive 2002/38/EC, the Belgian VAT
Act 705 provided that the place of supply in the case of intellectual property by a
foreign entrepreneur, was deemed to be the place where the Belgian customer was
established. 706 It further provided that the Belgian customer (taxable or non-taxable
person) was required to account for VAT under a reverse-charge mechanism. 707 It is
not certain whether the Belgian Tax authority treated digital products as the supply of
intellectual property rights before the introduction of Council Directive 2002/38/EC.
4.3.2.2 Place of supply under Council Directive 2002/38/EC
Under Council Directive 2002/38/EC, a new lex specialis which specifically provides
for place-of-supply rules in the case of electronically supplied services in article
9(2)(f), was incorporated in the Sixth Directive.
4.3.2.2.1 Differentiation between B2C and B2B transactions created
Where electronically supplied services are supplied to a non-taxable person who is

established, has a permanent address, or normally resides in a Member State by a
taxable person who is established, has a permanent address, or normally resides
outside of the European Community, 708 the place of supply shall be the place in a
Member State where the non-taxable person is so established, or has its permanent
address, or normally resides. 709 The introduction of article 9(2)(f) essentially creates
a distinction between the supply of electronically delivered goods by a business to a
704
Commissions Approach Intereconomics July/August at 156.
705
De Wetboek van de BTW, Wet van 3 Julie 1969.
706
Boomsma A, Ermel A, Somers J, Tirard J (1989) Ernst & Young VAT in Europe at 20.
707
Boomsma A, Ermel A, Somers J, Tirard J (1989) Ernst & Young VAT in Europe at 20.
708
As it was then known.
709
Article 9(2)(f) of the Sixth Directive 77/388/EEC as amended by article 1(b) of Council Directive 2002/38/EC.
150
consumer, and a business to a business. 710 This may prove problematic as suppliers
would now be required to determine the vendor registration status of the
customer. 711 Nevertheless, both EU and non-EU suppliers would be able to
determine the VAT registration status of the customer from the VAT Information
Exchange System (VIES) which contains a database of persons with VAT
registration numbers. 712 The VIES is an online validation system available to all
members of the public at no charge. 713 In order to verify the VAT vendor registration
status, the supplier must be in possession of the VAT registration number.
Therefore, unless the customer indicates his VAT registration status by producing a
VAT registration number, the supplier would be unable to determine if the customer
is a private consumer or a business. In addition, where the customer provides a VAT
registration number, the supplier cannot, by using the VIES system, verify if the
customer is who he says he is. 714 Verifying the customers identity and VAT
registration status, requires costly technology which is not widely accessible and
which most suppliers simply cannot afford to implement. 715 Article 18 of Regulation
no 282/2011, however, provides that a supplier may assume that the recipient is a
710
Consumers SA Merc LJ vol 16 no 4 at 580.
711
Consumers SA Merc LJ vol 16 no 4 at 580; Teltcher S (2000) Tarriffs, Taxes and Electronic Commerce:
Revenue Implications for Developing Countries Policy Issues in International Trade and Commodities Study
Series No 5 at 11; Boullin L (2003) "B2C Services: Liability for European VAT" World Internet Law Report vol 4
issue 7 at 10; Zubeldia GE (2011) Administrative Burdens on Cross-Border B2B Services under EU VAT
International VAT Monitor vol 22 no 4 at 221.
712
Recital (5) of Council Regulation 792/2002 of 7 May 2002; Ward BT, Sipior JC, Bremser W, McGinty DB
(2006) A Comparison of United States and European Union Taxation of E-commerce ICEC 06 Proceedings of
the 8th International Conference on Electronic Commerce at 347; Bill S and Kerrigan A (2003) Practical
Application of European Value Added Tax to E-commerce Georgia Law Review vol 38 at 78; De la Feria R
(2006) The EU VAT System and the Internal Market at 116; Bird RM and Gendron PP (2007) The VAT in
Developing and Transitional Countries at 139.
713
The VIES system is accessible at http://ec.europa.eu/taxation_customs/vies/; Bird RM and Gendron PP
(2007) The VAT in Developing and Transitional Countries at 139. A similar system has existed in Singapore for
some time.
714
Consumers SA Merc LJ vol 16 no 4 at 581; Henriques V, Azevedo L, Bonnet J, Carvalho P, Mathan L (2001)
Extending VAT to E-commerce: an Implementation of EU Proposals Euroweb 2001 at para 2.4; Zubeldia GE
(2011) Administrative Burdens on Cross-Border B2B Services under EU VAT International VAT Monitor vol 22
no 4 at 221; Lejeune I, Kotanidis S, Van Doninck S (2009) The New EU Place-of-Supply Rules from a Business
Perpective vol 20 no 2 at 101.
715
Extending VAT to E-commerce: an Implementation of EU Proposals Euroweb 2001 at para 2.4; Strunk G and
Bs S (2003) A German Perspective on Europes E-commerce VAT DirectiveTax Notes International vol 29 no
2 at 199.
151
taxable person (vendor) in the EU, when the supplier has verified the supplied tax
registration number, or where the customer has provided any other adequate proof
that demonstrates that it has legitimately applied for such registration in the EU. 716
Where the supplier cannot verify the VAT registration number because it has not
been correctly supplied, or not supplied at all, and no other reasonable proof exists
indicating the VAT registration status of the customer, the supplier may assume that
the customer is a non-taxable person. 717 When the customer is established outside
of the EU, the supplier may treat the customer as a business entity or VAT vendor if:
a) the customer has issued the supplier with a certificate issued by the tax
authority in the country where the customer is established, in terms of which it
can be deduced that the customer is entitled to obtain a VAT refund; 718
b) the customer has provided any number that would identify it as a business for
tax purposes, or any other proof evidencing its taxable status. 719
No criterion for establishing the meaning of any other proof is provided, which leads
to legal uncertainty. 720 Lejeune and others opine that an EU supplier may, where a
non-EU supplier has supplied a VAT number or any other proof, and where the EU
supplier has reasonable grounds to believe that the information so supplied is correct
and that the customer is acting in good faith, assume that the non-EU customer is a
registered VAT vendor in the country of establishment. 721 Real-time verification of
information is a prerequisite for effective online digital trade. While the real-time
verification of a registration number might be possible, the verification of any other
716
Council Implementing Regulation (EU) 282/2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 15 October 2012].

717
Article 18(2) of Council Implementing Regulation (EU) 282/2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 15 October 2012].
718
Article 18(3)a) of Council Implementing Regulation (EU) 282/2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 15 October 2012].
719
Article 18(3)b) of Council Implementing Regulation (EU) 282/2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 15 October 2012].
720
Lamensch M (2012) Unsuitable EU VAT Place of Supply Rules for Electronic Services-Proposal for an
Alternative Approach World Tax Journal vol 4 issue 1 at 84; Lejeune I, Cortvriend E, Accorsi D (2011)
Implementing Measures Relating to EU Place-of-Supply Rules: Are Business Issues Solved and is Certainty
Provided? International VAT Monitor vol 22 no 3 at 147.
721
Lejeune I, Cortvriend E, Accorsi D (2011) Implementing Measures Relating to EU Place-of-Supply Rules: Are
Business Issues Solved and is Certainty Provided? International VAT Monitor vol 22 no 3 at 148.
152
proof will take longer. 722 Suppliers will accordingly need to make a significant effort
to comply with the Regulations. 723 In all likelihood, suppliers would increasingly rely
on the customers good faith.
Ivanson points out that the VIES system requires human intervention as it cannot be
accessed electronically. 724 Simply put, the VAT registration number supplied by the
customer must physically be typed into the VIES system for verification to be
successful. This could seriously hamper e-commerce transactions which are
characterised by the fact that execution of transactions is automated. In a survey by
PricewaterhouseCoopers, only 78% of UK respondents actually obtain their
customers VAT numbers, and of these, only 50% take the trouble to verify the VAT
status with a reasonable degree of accuracy. 725 Furthermore, the VIES system can
only be applied in respect of businesses registered in the EU. 726 Determining the
VAT status of customers in other jurisdictions, would be more problematic as not all
jurisdictions have an electronic database of VAT vendors. 727
It has been pointed out that the type of supply could be indicative of the customers
VAT status. 728 Where films or photographs are purchased without the rights to the
intellectual property therein, it is likely that the purchaser is a non-taxable
722
Alternative Approach World Tax Journal vol 4 issue 1 at 84.
723
Lejeune I, Cortvriend E, Accorsi D (2011) Implementing Measures Relating to EU Place-of-Supply
Rules: Are Business Issues Solved and is Certainty Provided? International VAT Monitor vol 22 no 3
at 147.
724
Ivanson J (2003) Why the EU VAT and E-commerce Directive Does not Work International Tax Review vol
14 issue 9 at 28; Ivanson J (2003) "Overstepping the Boundary-How the EU got it Wrong on E-commerce"
International Tax Report October at 8.
725
726
Zubeldia GE (2011) Administrative Burdens on Cross-Border B2B Services under EU VAT International VAT
Monitor vol 22 no 4 at 221; Lejeune I, Kotanidis S, Van Doninck S (2009) The New EU Place-of-Supply Rules
from a Business Perpective vol 20 no 2 at 101.
727
Zubeldia GE (2011) Administrative Burdens on Cross-Border B2B Services under EU VAT International VAT
Monitor vol 22 no 4 at 221; Lejeune I, Kotanidis S, Van Doninck S (2009) The New EU Place-of-Supply Rules
from a Business Perpective vol 20 no 2 at 101.
728
59
153
consumer. 729 Even if the customer is a taxable consumer, it is likely that the products
will not be used in the making of taxable supplies. 730
The place-of-supply proxy in the case of B2C transactions by non-EU suppliers to
EU established customers provided for in article 9(2)(f), was incorporated in the recast version of the EU VAT rules in article 57(1) of Council Directive 2006/112/EC
which was in force until 31 December 2006. The application of article 57(1) of
Council Directive 2006/112/EC was extended until 31 December 2009 by article 1(2)
of Council Directive 2008/8/EC. Article 57(1) of the Council Directive was replaced
by an identical place-of-supply proxy in article 58 of Council Directive 2008/8/EC with
effect from 1 January 2010.
4.3.2.2.2 B2C transactions: EU supplier (until 31 December 2014)
The lex specialis provided for by article 9(2)(f) of Council Directive 2002/38/EC (and
the later article 59 of Council Directive 2008/8/EC which applies from 1 January 2010
until 31 December 2014), only applies to transactions concluded between a non-EU
supplier and a non-taxable person who is established or resides in the EU. In other
words, in so far as a taxable supplier, who is established or has a fixed business in a
Member State, renders electronically supplied services to a non-taxable person who
is established, or has a fixed address, or resides in the EU, the general place-ofsupply rule applies. 731 This is the place where the supplier is established or has a
729
59
730
59
731
42
154
fixed address from where its business is operated. 732 This will lead to market
distortions within the EU where consumers can seek digital products from suppliers
established in jurisdictions with a low VAT rate. Suppliers can relocate to jurisdictions
with a lower VAT rate and in so doing cause a VAT drain in the country of origin. 733
This could be further exacerbated by the relatively low cost of setting up and
establishing a virtual platform from which supplies are produced and delivered.
4.3.2.2.3 B2C transactions: EU supplier (from January 2015)
From January 2015, the destination principle will apply to B2C transactions by
suppliers who are established or have a fixed business in a Member State.
Consequently, the place of supply in the case of electronically supplied services will
be the Member State where the customer is established, or has a fixed address, or
where he resides. 734 This amendment places a greater burden on EU suppliers to
determine the exact location where the customer resides, and levy VAT on the
transaction at the rate applicable to that jurisdiction. 735 It is no longer sufficient
merely to establish whether the customer resides in or outside of the EU. This is
especially problematic in cases where a customer has his permanent registered
address in one country, but resides in another. 736 No official and verifiable elements
732
42
733
Int Veld TFG (2007) E-commerce en het Gebrek aan Fiscal Aanknopingspunten Weekblad Fiscale Recht
vol 136 no 6719 at 513; Bouwhuis PA (2002)E-commerce; Het Einde van de BTW? Weekblad Fiscale Recht vol
131 no 6471 at 345.
734
43
735
Lamensch M (2012) Proposal for Implementing the EU One-Stop-Shop Scheme from 2015 International
VAT Monitor vol 23 no 5 at 315; Minor R (2012) The European Comissions VAT Regulation project for supplies
of electronic services Tax Notes International vol 67 no 3 at 242.
736
Alternative Approach World Tax Journal vol 4 issue 1 at 84; Lamensch M (2012) Proposal for Implementing
the EU One-Stop-Shop Scheme from 2015 International VAT Monitor vol 23 no 5 at 315.
155
of identification exist in respect of these customers. 737 However, the number of

customers with a registered address in one country who reside in another country
would presumably be limited.
4.3.2.2.4 B2C transactions: Non-EU suppliers
The place-of-supply proxy in terms of article 9(2)(f) of Council Directive 2002/38/EC

upholds the consumption principle in terms of which electronically supplied services
are taxed at the place where they are deemed to be consumed by the consumer. 738
In contrast to the vague meaning of utilised and consumed in the Republic as found
in the definition of imported services in the South African VAT Act, 739 the place of
consumption in terms of article 9(2)(f), is deemed to be the place where the
consumer is established, or has a permanent address, or normally resides within the
EU. The actual place of consumption is negated by the deeming provision. The
deeming provision essentially eliminates problems associated with determining the
actual place of consumption - as is the case with customers who are travelling (see
example 3.5 above). In terms of this provision, it is unnecessary to find physical
evidence of where the service was physically rendered and where the benefit of the
service was applied in order to determine the place where it was utilised or
consumed. Irrespective of where the EU resident finds himself when the service is
delivered to him electronically, the service will be taxable in the Member State where
he normally resides. 740
737
Alternative Approach World Tax Journal vol 4 issue 1 at 84; Minor R (2012) The European Comissions VAT
Regulation project for supplies of electronic services Tax Notes International vol 67 no 3 at 242.
738
Consumers SA Merc LJ vol 16 no 4 at 580; Ward BT, Sipior JC, Bremser W, McGinty DB (2006) A Comparison
of United States and European Union Taxation of E-commerce ICEC 06 Proceedings of the 8th International
Conference on Electronic Commerce at 347; Bill S and Kerrigan A (2003) Practical Application of European
Value Added Tax to E-commerce Georgia Law Review 38 no 1 at 74.
739
740
Extending VAT to E-commerce: an Implementation of EU Proposals Euroweb 2001 at para 2.4; Parrilli DM
(2009) Electronically Supplied Services and Value Added Tax: The European Perspective Journal of Internet
Banking and Commerce vol 14 no 2 at 10.
156
The new place-of-supply rules have fundamentally changed the Sixth Directive in
respect of B2C transactions in two respects:
i) Supplies of electronically delivered services by EU registered vendors to
consumers who are established, or have a fixed address or reside outside of the
European Community, will no longer be subject to EU VAT. 741
ii) Supplies of electronically delivered services by a supplier who is not established
in the EU, to consumers who are established, or have a fixed address, or reside in a
Member State are subject to VAT in the EU. This means a non-EU vendor is
required to charge VAT on sales to private consumers in the EU, just as EU
registered vendors must charge VAT on domestic supplies. 742
These fundamental changes have eliminated the unfair competition that existed
between EU registered and non-EU registered vendors. EU vendors no longer
compete with untaxed supplies in the domestic market, and international supplies by
EU vendors can enter the market free of EU VAT. This does not necessarily place
EU suppliers at an unfair advantage in the international arena. This will depend on
the domestic rules of the country to which the electronically delivered goods are
exported or in which they are consumed. Where the domestic rules of the country of
consumption do not provide for the taxation of the supply, or the supply is not
properly taxed as a result of an ineffective reverse-charge mechanism, the supply
from an EU supplier will be advantaged over supplies made by domestic suppliers
which are subject to local taxes.
Article 1(c) of Council Directive 2002/38/EC further amended article 9(3) of the Sixth
Directive (discussed in paragraph 4.3.2.1 above) to exclude the application of article
9(3) from electronically supplied services to non-taxable persons. Therefore,
Member States cannot consider the place of actual consumption or enjoyment of
electronically supplied services as the place of supply when these services are
741
742
Consumers SA Merc LJ vol 16 no 4 at 580; Parrilli DM (2009) Electronically Supplied Services and Value
Added Tax: The European Perspective Journal of Internet Banking and Commerce vol 14 no 2 at 10.
157
rendered to non-taxable persons. 743 This position was incorporated in article 59a of
Council Directive 2008/8/EC which applies until 31 December 2014. It should,
however, be noted that the use-and-enjoyment provision will continue to apply to
telecommunication systems in terms of article 9(3). The amended article 59a of
Council Directive 2008/8/EC which will apply from 1 January 2015, provides that, in
order to prevent double taxation, no taxation and the distortion of competition,
Member States may:
(a)
consider the place of supply of any or all of those services, if situated within
their territory, as being situated outside of the Community if the effective use
and enjoyment of the services takes place outside of the Community;
(b)
consider the place of supply of any or all of those services, if situated outside
of the Community, as being situated within their territory, if the effective use
and enjoyment of the services takes place within their territory.
This provision is similar to the use-and-enjoyment provision under the South African
VAT Act. 744
Van der Merwe points out that the place-of-supply proxies reflect the true nature of
events more accurately than was previously the case. 745 It can be assumed that nonbusiness consumers are likely to use and enjoy the services predominantly in the
country in which they reside rather than elsewhere.
Cases where the use and
enjoyment of the services takes place exclusively in a jurisdiction outside of the

consumers normal place of residence, should be seen as the exception rather than
the rule, and could, for VAT purposes, be negated. This would happen, for example,
where an EU resident downloads a temporary map of Kuala Lumpur on a device
while he travels through Malaysia. It should, however, be noted that the amendment
of article 59a of Council Directive 2008/8/EC that will take effect from 1 January
2015, provides, in principle, that services could be taxed in the jurisdiction where
they are actually utilised and enjoyed. In other words, where the EU resident
743
744
Definition of imported services in section 1 of the VAT Act 89 of 1991.
745
158
downloads a map while he travels through Malaysia, the transaction could, if article
59a is applied, be taxed in Malaysia (GST) where the map is used and enjoyed,
irrespective of the fact that he has a fixed address in the EU. Similarly, where a
South African resident downloads a map of Moscow while he is in transit in Europe,
the transaction can be taxed in Russia where the map will be utilised and consumed.
Although international experience shows that the place of real consumption of
services is not an effective criterion for taxing services, the EU legislator increasingly
relies on this criterion instead of adopting a more comprehensive and clear list of
place-of-supply rules. 746 It is not certain to what extent Member States will implement
the effective use-and-enjoyment provision, if at all. No definition of the expression
effective use and enjoyment can be found in the Sixth Directive. 747 The exact
meaning of the phrase is open to interpretation. While the actual place-ofconsumption rules give effect to the fundamental VAT principle of taxing the supplies
at the place of consumption, the desirability of its application in the case of digital
products is questionable. This is evident from the interpretation of the phrase
utilised and consumed in the Republic in the South African case law discussed in
paragraph 3.4.2.4.1 above. Determining the actual place of consumption often relies
on the interpretation of the taxpayer. In addition, the actual place of consumption
can, at best, be determined after consumption has commenced and not during the
transactional phase of the supply. 748 In the absence of a personal after-sale
relationship with the customer (for example telecommunication services), 749 this
would require some sort of tracking facility to enable the supplier to track the actual
usage of the supplies. This could require a long, drawn out analysis that would most
likely result in inaccuracies. 750 Given the nature of online services and the lack of
guidelines in the EU VAT Directive, it would be impossible for suppliers to determine
746
Ecker T (2012) Place of effective use and enjoyment of services-EU History repeats itself International VAT
Monitor vol 23 no 6 at 407; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 215.
747
at 417; Anthony R (2000) European VAT on E-commerce Services: Tax & VAT Planning of Place of Supply
Criteria Tax Planning International E-commerce vol 2 no 5 at 20; De la Feria R (2006) The EU VAT System and
the Internal Market at 107.
748
Monitor vol 23 no 6 at 409.
749
Hobbs C and Christie K (2011) Cloud Computing and VAT Tax Notes International vol 62 no 11 at 899.
750
Jenkins P (1999) VAT and Electronic Commerce: The Challenges and Opportunities International VAT
Monitor vol 10 no 1 at 4; De la Feria R (2006) The EU VAT System and the Internal Market at 107.
159
the actual place of consumption. 751 In addition, the interpretation of effective use
and enjoyment differs in the different Member States. 752
As I stated earlier, the
actual place of consumption and the place of residence are likely to coincide, and
any difference should be treated as an exception under exceptional circumstances.
In any event, the provision is rarely applied except to telecommunication services for
which the rule was initially designed. 753 The general place-of-consumption rules
governing electronically supplied services, that deem the customers place of
residence as the place of consumption, should prevail. To ensure that suppliers can
properly comply with VAT rules, VAT legislation should predominantly rely on
predetermined presumptions and proxies. 754 The use of these proxies is also the
preferred approach of the OECD. 755 As the effective use-and-enjoyment rules have
been laid down as optional provisions (from 1 January 2015), and given the difficulty
with which they can be applied in practice, it is unlikely that Member States will
implement them. 756
Member States are more likely to opt for a coordinated
implementation of the general place-of-supply provisions rather than creating tax

competition between Member States by implementing the use-and-enjoyment
provision. 757 In addition, the main purpose behind the use-and-enjoyment provision,
751
Alternative Approach World Tax Journal vol 4 issue 1 at 85; Lamensch M (2012) Proposal for Implementing
the EU One-Stop-Shop Scheme from 2015 International VAT Monitor vol 23 no 5 at 315; Ecker T (2012) Place
of effective use and enjoyment of services-EU History repeats itself International VAT Monitor vol 23 no 6 at
409.
752
Anthony R (2000) European VAT on E-commerce Services: Tax & VAT Planning of Place of Supply Criteria
Tax Planning International E-commerce vol 2 no 5 at 20; De la Feria R (2006) The EU VAT System and the
Internal Market at 107; Ecker T (2012) Place of effective use and enjoyment of services-EU History repeats
itself International VAT Monitor vol 23 no 6 at 409.
753
Anthony R (2000) European VAT on E-commerce Services: Tax & VAT Planning of Place of Supply Criteria
Tax Planning International E-commerce vol 2 no 5 at 20; Harley G (1999) "VAT and the Digital Economy: How
Can VAT Evolve to Meet the Challenges of E-commerce" Tax Planning International E-commerce vol 1 no 10 at
11; Hinnekens L (2002) "An Updated Overview of the European VAT Rules Concerning Electronic Commerce"
EC Tax Review vol 11 issue 2 at 68; Lambourne M (2005) On the Horizon: New EU VAT Place of Supply Rules
for Services Tax Planning International: European Union Focus vol 7 no 1 at 14; Wille P (2009) New EU Placeof-Supply rules for services International VAT Monitor vol 20 no 1 at 15.
754
Monitor vol 23 no 6 at 409; Millar R (2008) Jurisdictional Reach of VAT in Krever R (ed) (2008) VAT in Africa at
177, 180, 182-184.
755
See paragraphs 5.3.2.1 and 5.3.2.2 below.
756
Van Doesum A, Van Kesteren H, van Norden GJ, Reiners I (2008) The New Rules on the Place of Supply of
Services in European VAT EC Tax Review vol 17 issue 2 at 86; Wille P (2009) New EU Place-of-Supply rules for
services International VAT Monitor vol 20 no 1 at 15.
757
Van Doesum A, Van Kesteren H, van Norden GJ, Reiners I (2008) The New Rules on the Place of Supply of
Services in European VAT EC Tax Review vol 17 issue 2 at 86.
160
is to eliminate double taxation or unintended non-taxation under the general placeof-supply rules. Therefore, Member States can only apply the use-and-enjoyment
criteria if it can be established that the general place-of-supply rules lead to double
taxation or unintended non-taxation. 758
The place-of-supply rules are founded on the premise that the supplier is able to
determine the place where the consumer is established, or has a fixed address, or
resides. In the case of tangible goods, the address of delivery is fairly indicative of
the place of consumption. 759 In the absence of guidelines, determining the place of
supply/consumption for digital deliveries is cumbersome. 760 The supplier could rely
on the information supplied by the customer, but then runs the risk of incurring
penalties or recourse being taken against it, for under or over taxing a customer as a
result of false information obtained. 761 Most suppliers are not equipped to verify the
customers self-declared information and should, as a matter of principle, not be
burdened with the obligation of verifying this information. 762 In the absence of
physical contact between the parties, and given the speed and anonymity at which ecommerce is traded, the customer status and location would be difficult to
determine. 763 Potential customers are likely to abandon the transaction where the
supplier requests personal information, as this is often perceived as an invasion of
758
Van Doesum A, Van Kesteren H, van Norden GJ, and Reiners I (2008) The New Rules on the Place of Supply
of Services in European VAT EC Tax Review vol 17 issue 2 at 87.
759
Transactions Information & Communications Technology Law vol 13 no 2 at 185; Directorate-General for
Internal Policies (2012) Simplifying and Modernising in the Digital Single Market at 11
760
Minor R (2012) The European Comissions VAT Regulation project for supplies of electronic services Tax
761
Alternative Approach World Tax Journal vol 4 issue 1 at 81; Hardesty D (2002) European VAT on Digital
Sales Tax Planning International E-commerce vol 4 no 3 at 4; Ivanson J (2003) "Overstepping the BoundaryHow the EU got it Wrong on E-commerce" International Tax Report October 2003 at 9; Lamensch M (2012)
Proposal for Implementing the EU One-Stop-Shop Scheme from 2015 International VAT Monitor vol 23 no 5
at 315.
762
Lamensch M (2011) New Implementing Regulation 282/2011 for the 2006 VAT Directive EC Tax Review
763
161
privacy. 764 Bleuel and Stewen suggest that two methods of identifying the customer
exist: tracing the delivery path of the supply, or tracing the path of payment. 765
Tracing the path of supply relies on the IP address of the computer or device to
which the digital products will be delivered. It is trite that every computer is assigned
an unambiguous address consisting of either 4 digits, or a corresponding sequence
of signs. 766 Tracing the path of delivery using the sequence method, is indicative of
the place where the customer finds himself when making the purchase. 767 This place
could be very different from the customers place of residence. For example, where
the customer resides in Germany, but purchases digital products from his work
computer in Switzerland, the places of purchase and consumption differ. Article 24 of
Regulations 282/2011, provides that, as from January 2013, priority should be given
to the place that best ensures taxation at the actual place of consumption. This puts
an even greater burden on suppliers not only to determine the place of supply, but
also to distinguish this from the actual place of consumption. Lamensch opines that
the Regulations, just like the 1998 OECD guidelines on which they are modelled, are
unconvincing. 768 Unless the digital products emit signals to the supplier every time
they are accessed/used/enjoyed the supplier will have no control over where or
when the customer consumes the supplies.
Furthermore, where the destination computer is connected to an international service
provider, such as Compuserve or AOL, the IP address attached to the computer
could be shared on a limited network. 769 As the system can assign the same number
to different computers at different times, it would not be possible correctly to identify
764
Transactions Information & Communications Technology Law vol 13 no 2 at 185; Baron R (2002) VAT on
Electronic Services: The European Solution Tax Planning International E-commerce vol 4 no 6 at 4; Baron R
(2001) The OECD and Consumption Taxes Part 1 Tax Planning International E-commerce vol 3 no 9 at 5.
765
766
767
768
769
162
the location of the computer. 770 Digital products are also often delivered at one IP
address (remote server in a low-tax jurisdiction) from where they are later further
downloaded anywhere in the world. 771 It should further be noted that where a
resident of Belgium uses a portable device, such as an iphone, across the border in
Luxembourg, a different IP address is assigned to the device. The Belgian resident
can therefore download a large volume of digital media while he is in Luxembourg
and pay VAT at 15 per cent on the downloads, as opposed to the 21 per cent
Belgian VAT that should apply as he resides in Belgium. 772 Baron notes that
suppliers acting in good faith, should be allowed to assume that the location as
determined at the time of purchase is a good enough proxy for the place of
residence. 773
While complex technology can in some cases be applied to trace the origin (however
uncertain) of the computer used to make the purchases, it should be noted that it is
not widely available and often expensive to acquire and apply. In addition, software
exists that can obscure the transaction/delivery path, or even hack the IP address of
another computer and display it as the purchasers computer address. Lamensch
points out that it would be unfair to require suppliers to obtain this expensive
software to collect taxes on behalf of the fiscus, especially where the supplier
receives no incentive for tax collection. 774
Measures to protect internet users from identity theft and banking fraud, make
identifying the purchaser by tracing the payment path even more cumbersome than
770
771
11
772
44
773
Baron R (2002) VAT on Electronic Services: The European Solution Tax Planning International E-commerce
vol 4 no 6 at 4; Baron R (2001) The OECD and Consumption Taxes Part 1 Tax Planning International Ecommerce vol 3 no 9 at 7.
774
163
doing so by tracing the delivery path. 775 Credit cards contain an international country
code in the card number that can easily identify the country where the card was
issued. 776 This information can be verified against information supplied in the
customers self-declaration. 777
That said, credit card payments are increasingly
completed under a secure electronic transaction protocol which hides the

purchasers identity and credit card number from the supplier. 778 Other payment
methods such as Paypal or Digicash, are completely anonymous and there is no
way that the supplier can identify the customers country of residence. 779
Furthermore, a resident of the EU can be in possession of a credit card that was
issued in the USA and use it as payment, and by so doing escape EU VAT where
the credit card is used to identify him as a resident of the USA. Suppliers would
therefore find it increasingly difficult to rely on payment information as a location tool.
It is not certain what criteria the European Commission will propose to determine the
customers location, but it has been suggested that a combination of criteria should
be applied - especially in cases where different results from different criteria can be
obtained. 780 It is also not certain to what extent the supplier must go to verify the
purchasers place of residence. Is it required to apply software that can track and
trace the supply with absolute accuracy? Article 23 of Regulations 282/2011 merely
provides that:
...the supplier shall establish that place based on factual information provided by the
customer, and verify that information by normal commercial security measures such as
those relating to identity or payment checks.
775
776
777
778
Commissions Approach Intereconomics July/August at 158; Fridenskld E (2004) VAT and the Internet: The
Application of Consumption Taxes to E-commerce Transactions Information & Communications Technology
Law vol 13 no 2 at 186.
779
Fairpo CA (1999) "VAT in the European Union-Where are we now" Tax Planning International E-commerce
vol 1 no 9 at 19; Lamensch M (2012) Proposal for Implementing the EU One-Stop-Shop Scheme from 2015
International VAT Monitor vol 23 no 5 at 315; Lamensch M (2011) New Implementing Regulation 282/2011
for the 2006 VAT Directive EC Tax Review vol 20 issue 4 at 171.
780
44
164
In the UK, a supplier should be able to show that it has applied a combination of
location tools, including customer provided information, cross-checking of payment
and delivery information for discrepancies, and geo-location software. 781
The Council Directives do not provide a safe harbour to help vendors determine the
residence of individual customers. 782 The vendor would not be protected in the case
of discrepancies where inaccurate information is bona fide obtained. 783 Penalties can
be imposed on suppliers for failing to establish the correct location of the customer
and the subsequent failure to apply the appropriate VAT rate. 784 The European
Commission is, however, engaged on a project to address the issue before the
implementation of the 2015 amendments. 785 Lamensch opines that the 2015
provisions are not implementable at all. 786 This is because no official and verifiable
elements of identification are available regarding private consumers. 787 Ultimately it
is a question of good faith. Where the supplier has verified that the customer has
provided a consistent set of information with a valid credit card, billing address, and
IP address, all indicating the same address as residence, it can be said that the
supplier has acquitted itself of its duty to determine the customers location. 788
4.3.2.2.5 B2B transactions: EU and non-EU suppliers
781
HM Customs and Excise (2003) Electronically supplied services: Evidence of Customer Location and
Status Tax Planning International E-commerce vol 5 no 5 at 14.
782
Fitzgerald S (2002) US Companies Sales to EU Consumers Subject to VAT on Digital Downloads The Tax
Adviser June at 382.
783
Fitzgerald S (2002) US Companies Sales to EU Consumers Subject to VAT on Digital Downloads The Tax
784
Ivanson J (2003) Why the EU VAT and E-commerce Directive Does not Work International Tax Review vol
14 issue 9 at 28; Ivanson J (2003) "Overstepping the Boundary-How the EU got it Wrong on E-commerce"
International Tax Report October at 9.
785
43
786
787
Alternative Approach World Tax Journal vol4 issue 1 at 84; Lamensch M (2011) New Implementing
Regulation 282/2011 for the 2006 VAT Directive EC Tax Review vol 20 issue 4 at 171.
788
61
165
As VAT systems are designed to tax supplies at the level of consumption, EU

businesses that acquire goods or services from other EU businesses are entitled to a
deduction on the VAT paid on the supplies. 789 VAT is again levied when the EU
business renders supplies to consumers. 790 Where the EU business acquires digital
products from a non-EU business for the purpose of making national supplies, no
VAT is paid to the seller, but the buyer should impose VAT in terms of the rules of its
own country in accordance with the reverse-charge mechanism. 791 Put simply, the
place of supply is where the purchaser vendor is established, or has its fixed
address. The position is well explained by the Dutch tax authorities where they
clearly distinguish between supplies from EU and non-EU vendors. 792
In the case of digital supplies by an EU vendor to another EU vendor, the EU
supplier (German) will levy VAT at zero percent on the supplies made to the
purchaser (Dutch). The Dutch purchaser will account for VAT in The Netherlands on
the value of the supply. It will simultaneously be entitled to show a deduction in its
VAT return for the VAT paid on the imported supplies, provided that the supplies are
used in the making of taxable supplies in the Netherlands. 793
Similarly, where digital services are imported from a non-EU vendor, the VAT is
diverted to the EU purchaser (Dutch) who must account for output VAT on the
789
Henriques V, Azevedo L, Bonnet J, Carvalho P, Mathan L (2001) Extending VAT to E-commerce: an

Implementation of EU Proposals Euroweb 2001 at para 2.4; Terra BJM and Kajus J (1992) Introduction to
Value Added Tax in the EC after 1992 at 14-15.
790
Implementation of EU Proposals Euroweb 2001 at para 2.4; Terra BJM and Kajus J (1992) Introduction to
Value Added Tax in the EC after 1992 at 14-15.
791
Implementation of EU Proposals Euroweb 2001 at para 2.4; Parrilli DM (2009) Electronically Supplied
Services and Value Added Tax: The European Perspective Journal of Internet Banking and Commerce vol 14
no 2 at 10; Butler B (2010) Place of supply of services: New VAT rules applying in the European Union
International Tax Journal September-October at 14; Bill S and Kerrigan A (2003) Practical Application of
European Value Added Tax to E-commerce Georgia Law Review vol 38 at 78.
792
De Nedelandse Belastingdienst
http://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/belastingdienst/zakelijk/btw/zakendoen_met
_het_buitenland/goederen_en_diensten_afnemen_uit_andere_eu_landen/goederen_en_diensten_afnemen_
uit_andere_eu_landen [accessed on 11 October 2012]; Directorate-General for Internal Policies (2012)
Simplifying and Modernising in the Digital Single Market at 29
793
uit_andere_eu_landen [accessed on 11 October 2012].
166
supplies but may simultaneously claim an input VAT deduction in so far as the
supplies will be used in the making of taxable supplies. 794
These provisions are similar to the South African position in so far as the VAT
treatment of imported services by VAT vendors is concerned. The South African and
EU (in particular, the Dutch) provisions only differ in respect of the reporting of the
transactions. The South African system does not provide for the taxing of the imports
(in the form of output VAT) and simultaneous input VAT deductions. Both systems
rely on the interpretation by the taxpayer of the principle of applied to make taxable
supplies. As the South African system does not require output VAT to be paid on
imports that are applied in the course and furtherance of an enterprise, many
taxpayer vendors do not report digital imports on their VAT returns. These
transactions go undetected, and SARS has limited scope to verify whether the
services were acquired in the making of taxable supplies. The Dutch system, on the
other hand, provides greater transparency for the Belastingdienst to audit
transactions and verify whether the services were acquired in the making of taxable
supplies. The administrative burden on taxpayers to account for VAT and claim an
input VAT deduction on imports is no different from the administrative burden of
reporting domestic transactions.
It should, however, be noted that from 1 January 2010, where the head office of the
customer is established in the same Member State as that of the supplier, the
reverse-charge mechanism shall not apply, irrespective of whether the head office
has intervened in the transaction or not. 795 Since the terms fixed establishments
and intervention are not clearly defined, different interpretations of the location of
the supply can arise. 796 This could lead to the double or under taxation of
transactions.
794
uit_andere_eu_landen [accessed on 11 October 2012].
795
Article 54 of Council Implementing Regulation (EU) no 282/2011 of 15 March 2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 10 October 2012].
796
Merkx M (2012) Fixed Establishments and VAT Liabilities Under EU VAT-Between Illusion and Reality
International VAT Monitor vol 23 no 1 at 25
http://www.empcom.gov.in/WriteReadData/UserFiles/file/No_1%20A-3%20European%20Union%20-
167
The amended article 44 of Council Directive 2006/112/EC which applies from 1

January 2010, provides that where services are supplied to the fixed establishment
of a taxable person at a place other than the place where the taxable person has
established its business, the place of supply shall be the place where the fixed
establishment is located. Where this fixed establishment or place of established
business cannot be located, the place where the taxable person has its permanent
address or where it resides shall be the effective place of supply. 797
The concept of fixed establishment is not defined in the Directive. 798 Before the
publication of Implementing Regulation no 282/2011 of 15 March 2011, the meaning
of fixed establishment as interpreted by the European Court of Justice (ECJ) was
followed. In Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt, 799 the ECJ ruled
that:
...the establishment must be of a certain minimum size and both human and technical
resources necessary for the provision of the services are permanently present.
800
The primary point of reference is where the supplier has established his business
because this is essentially the place from where the supplier conducts its business as
headquarter. 801 Where this leads to conflicts between Member States or irrational
results for tax purposes, the fixed establishment from where the services are supplied
should be taken into account. 802 In applying this criterion, the court came to the
%20Fixed%20Establishments%20and%20VAT%20Liabilities%20under%20EU%20VAT%20%E2%80%93%20Betw
een%20Delusion%20and%20Reality%20Jan%20Feb%20page%2022-26.pdf [accessed on 22 October 2012].
797
Article 44 of Council Directive 2006/112/EC as amended by Council Directive 2008/8/EC.
798
European Union Journal of Media Business Studies vol 4 no 2 at 75. Doernberg RL, Hinnekens L, Hellerstein W,
Li J (2001) Electronic Commerce and Multi-jurisdictional Taxation at 408; Terra BJM and Kajus J (2012) A Guide
to the European VAT Directives vol 1 at 655-656.
799
Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt Case C-168/84 (1985) ECR I-02251.
800
Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt Case C-168/84 (1985) ECR I-02251 at para 18. This
definition was also applied in Faaborg Gelting Linien A/S v Finazamt Flensburg Case 231/94 (1996) ECR I-2395
at para 17 and in ARO Lease BV v Inspecteur van de Belastingdienst Groete Ondernemingen to Amsterdam Case
C-190/95 (1997) ECR I-4383 at para 15.
801
Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt Case C-168/84 (1985) ECR I-02251 at para 17;
Rendahl P (2007) An Overview of Consumption Tax Implications on Sale of Digital Downloads in the European
Union Journal of Media Business Studies vol 4 no 2 at 75; Doernberg RL, Hinnekens L, Hellerstein W, Li J (2001)
Electronic Commerce and Multi-jurisdictional Taxation at 410.
802
Union Journal of Media Business Studies vol 4 no 2 at 76; Doernberg RL, Hinnekens L, Hellerstein W, Li J (2001)
Electronic Commerce and Multi-jurisdictional Taxation at 410.
168
conclusion that gaming machines on board a ferry do not constitute a fixed

establishment and the transaction should be taxed at the location where the
supplying company has established its business. 803 Applying these principles laid
down by the ECJ will exclude many modern day e-commerce suppliers from having a
fixed establishment. So, for example, where a supplier operates its business by
means of a server, the server itself cannot constitute a fixed establishment partly
because of the lack of human involvement and possibly partly because of its size. 804
In these cases the amended article 44 should be applied to tax the supplies where
the taxable entity has its fixed address or where it resides. That said, the place of
business is not necessarily the registered offices, especially in cases where no
significant business is carried on at the registered offices. 805 However, in ARO Lease
BV v Inspecteur van de Belastingdienst Groete Ondernemingen to Amsterdam, 806 the
ECJ concluded that the leasing of motor vehicles in Belgium by a company
established in the Netherlands, did not amount to the supply of services from an
establishment in Belgium. Despite the fact that the activities were carried on at an
establishment other than the place of fixed establishment, the ECJ ruled that the
place of consumption in the case of transport services, which can easily cross
borders, is difficult to determine. 807 As a result, the place of fixed establishment
should be deemed the place of supply.
In contrast, in Commissioner of Customs and Excise v DFDS A/S, 808 the ECJ ruled
that the independent nature and the contractual obligations imposed by the parent
company on the subsidiary, warrants the conclusion that the place where the
economic activity is executed satisfies the requirements of a fixed establishment. 809
In this case, a fully independent subsidiary of a Danish tour operator parent company
803
Union Journal of Media Business Studies vol 4 no 2 at 76.
804
805
at 408.
806
ARO Lease BV v Inspecteur van de Belastingdienst Groete Ondernemingen to Amsterdam Case C-190/95
(1997) ECR I-4383 at para 27.
807
ARO Lease BV v Inspecteur van de Belastingdienst Groete Ondernemingen to Amsterdam Case C-190/95
(1997) ECR I-4383 at para 18.
808
Commissioner of Customs and Excise v DFDS A/S Case (1997) C-260/95 ECR I-01005.
809
Commissioner of Customs and Excise v DFDS A/S Case C-260/95 (1997) ECR I-01005 at paras 26-29.
169
supplied tour packages in the UK. The ECJ ruled that the UK based subsidiary
presented the requisite minimum level of human intervention and technical resources
required to satisfy the features of a fixed establishment. 810
The case law offers little guidance on the application or non-application of the fixed
establishment rule. 811 It is clear from the judgments that the courts are reluctant to
give effect to secondary fixed establishments. 812 Doernberg and others opine that a
party can argue that the main place of business-test in the Aro case is appropriate
in the interest of simplification, uniformity, and clarity. 813 On the other hand, the fixed
establishment-test in the DFDS case, is more appropriate as the place of businesstest lead to competitive disadvantages and does not accurately reflect the economic
situation. 814 The concept of fixed establishment has not yet been reviewed in the
context of e-commerce, and the outcome remains speculative. In the light of the
Berkholz case, it is likely that a supplier of automated services can manipulate its
business structures to avoid taxation in the country of supply and secure taxation in
low-tax jurisdictions where it has established its headquarters. In this regard Farmer
and Lyal have adopted the more effective view:
It is submitted that, in a genuine case in which the supplier or customer has several
business establishments all capable of performing services, the most appropriate
method of determining the place of supply for the purposes of article 9(1) or 9(2)(e)
would be to identify the establishment of the supplier whose resources were
primarily used for supplying the services or the establishments of the customer
which made primary use of the service.
815
Merkx, however, points out that it is no easy task to determine where the recipient is
established in the case of cross-border B2B transactions. 816 This can be
810
Commissioner of Customs and Excise v DFDS A/S Case C-260/95 (1997) ECR I-01005 at para 27.
at 415.
812
Terra B and Kajus J (2012) A Guide to the European VAT Directives vol 1 at 659.
813
at 413.
814
at 413.
815
Farmer P and Lyal R (1994) EC Tax Law at 160.
816
http://www.empcom.gov.in/WriteReadData/UserFiles/file/No_1%20A-3%20European%20Union%20811
170
exacerbated by the fact that fixed establishment may be interpreted differently in

Member States. 817 In terms of article 11(3) of Council Implementing Regulation (EU)
no 282/2011, a VAT identification number is in itself not sufficient to determine if the
customer has a fixed establishment. 818 The term fixed establishment is defined as:
..any establishment, other than the place of establishment of a business... characterised
by a sufficient degree of permanence and a suitable structure in terms of human and
technical resources to enable it to receive and use the services supplied to it for its own
needs.
819
Merkx correctly points out that this definition lacks clarity as it does not demand that
the physical presence of the customer is required to take part in economic activity. 820
Lamensch questions whether suppliers providing electronic services such as the
supply of information from a database, have a sufficient degree of permanence and
a suitable structure in terms of human and technical resources to receive and use
the service. 821 Furthermore, it does not state what degree of permanency is
required to satisfy the requirement of established. 822 In essence, the definition put
forward by the Regulation, is a mere extension of the principles laid down in the
Berkholz case. 823 The supplier, recipient, and the respective tax authorities could, in
%20Fixed%20Establishments%20and%20VAT%20Liabilities%20under%20EU%20VAT%20%E2%80%93%20Betw
817
818
Council Implementing Regulation (EU) no 282/2011 of 15 March 2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 10
October 2012].
819
Article 11(1) of Council Implementing Regulation (EU) no 282/2011 of 15 March 2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 10 October 2012].
820
http://www.empcom.gov.in/WriteReadData/UserFiles/file/No_1%20A-3%20European%20Union%20%20Fixed%20Establishments%20and%20VAT%20Liabilities%20under%20EU%20VAT%20%E2%80%93%20Betw
821
822
823
Minor R (2011) New EU VAT Regulation: A Look at Place of Establishment Regarding B2C Services Tax
171
principle, have different interpretations of what established means. 824 In addition,

the rules are not clear where the company is established in one Member State and
has branches in various other Member States. If purchases are centrally completed
by head office, and then distributed to the individual branches, can it be said that the
supply was made to head office or to the individual branches? The Council
Implementing Regulations (EU) no 282/2011 sets out criteria for determining the
customer and its location. These include: i) determining if the customer pays for the
services; ii) the nature and the use of the service; and iii) verifying the VAT number
of the customer. 825 Where these criteria have been applied and the place of supply
cannot be established with certainty, the supplier can legitimately assume that the
supply was made where the business (head office) is established. 826 As a result of
the international phenomenon of centralising payments, the direction of the payment
flows can, strictly speaking, not be applied to locate the customer. 827 Merkx points
out that suppliers are undoubtedly aware of the nature and the use of their supplies,
but the knowledge can hardly be applied to determine the actual place of supply
unless it was physically rendered at the customers business premises. 828 While
these regulations are already burdensome on suppliers of conventional offline
services, they may be virtually impossible to implement in the digital context. 829
Furthermore, the recipient can manipulate the information to indicate a certain
branch or office as the location of the supplies to account for VAT in a low VAT-rate
824
825
826
827
Lamensch M (2011) New Implementing Regulation 282/2011 for the 2006 VAT Directive EC Tax Review
828
829
Alternative Approach World Tax Journal vol 4 issue 1 at 83; Lejeune I, Cortvriend E, Accorsi D (2011)
Implementing Measures Relating to EU Place-of-Supply Rules: Are Business Issues Solved and is Certainty
Provided? International VAT Monitor vol 22 no 3 at 149.
172
jurisdiction where it is established. 830 Taxing B2B cross-border transactions at

destination, relies chiefly on the suppliers good faith in collecting tax and remitting it
to the tax authorities. 831
In terms of the Sixth Directive, VAT becomes chargeable when the tax authority
becomes entitled to claim tax from the person liable to pay, notwithstanding that the
time of payment may be deferred. 832 The chargeable event occurs when the goods
are delivered or when the services have begun. 833 Where payment was received
before the goods are delivered or the services performed, the chargeable event
occurs when such payment is made. 834 Member States were allowed to derogate
from the general rule under certain circumstances or in the case of certain
transactions. This was achieved by deeming the date of issuing of an invoice or
document serving as an invoice, to be the time of the supply. 835
In the case of electronically ordered but physically delivered goods from a supplier
outside of the Community, the time of supply is when the goods enter the European
Community. 836 Where the goods so imported are subject to custom or similar duties,
the chargeable event (time of supply) is the time when the chargeable event for such
customs or similar duties occurs. In other words, VAT shall be levied at the same
830
831
832
Article 10(1) of the Sixth Directive 77/388/EEC; also see re-casted version in article 62 of the Council
Directive 2006/112/EC.
833
Directive 2006/112/EC
834
835
836
Article 30 of the Council Directive 2006/112/EC.
173
time as customs or similar duties, i.e. when the goods enter a customs area for
clearing and taxing. This is similar to the South African position.
Neither the Sixth Council Directive nor Council Directive 2002/112/EC provides rules
for the treatment of prepaid vouchers or vouchers entitling the holder to a discount or
goods or services at no charge. As a result, Member States have adopted their own
rules which are described by the European Commission as being inevitably
uncoordinated. 837
In the case of prepaid phone cards, there is no clarity on the time of supply. Should
VAT be paid when the prepaid phone card is purchased or when the actual service
has begun? It should be noted that in Europe, as is increasingly the case in the rest
of the world, the credit on a prepaid phone card can be applied to purchase various
other goods and services and is not restricted to the use of telecommunication
services. In contrast to the South African VAT system, different VAT rates apply in
the case of different supplies of goods or services in European Member States. To
further complicate matters, different VAT rates apply in different Member States. The
absence of harmonised rules has further forced Member States to develop their own
rules on the treatment of vouchers, all unsynchronised. 838 The complexity of the
issue can best be described by way of example Example 4.2: X who is resident in the Netherlands, purchases a prepaid
phone card voucher in the Netherlands. He uses some of the credit on the
phone card on 1 December 2012 in Germany to inform his family of his
safe arrival. From Germany, X travels to Luxembourg where he uses some
of the credit on the phone card to inform his family of his safe arrival and to
download various applications, games, and useful software for his phone.
On his return to the Netherlands, the credit remaining on the phone card is
used to make donations to charitable organisations by sending text
messages to a short service number.
837
Cowly R (2012) European Commission Review of VAT on Vouchers Irish Tax Review vol 25 no 3 at 97.
European Commission ( 2012) Draft proposal a Council Directive Amending Directive 2006/112/EC on the
Common System of Value Added Tax, as Regards the Treatment of Vouchers at 2
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/key_documents/legislation_propos
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Van Vught YM and Edie M (2007) Thats the Card to
Play to Treat Prepaid Telephone Cards International VAT Monitor vol 18 no 3 at 166.
838
174
Should the value of the phone card be taxed when X purchased the card in the
Netherlands or should the individual type of services acquired by the credit on the
phone card, be taxed in the jurisdiction and at the time and rate applicable in the
jurisdiction when the credit was exchanged for the specific services?
Similarly, where a consumer purchases vouchers in one country and redeems them
in another country, the question arising is whether the voucher should be charged
with VAT when it was issued or when it was redeemed? 839 Some Member States tax
the most common vouchers on issue, whilst others tax them at redemption. 840 These
mismatches between Member States could lead to double taxation or the failure to
tax at all. 841 In example 4.2 above, X could be taxed in the Netherlands on issue of
the phone card and taxed again on the redemption of the credit on the phone card in
Germany, Luxembourg, and the Netherlands.
To address these issues, the European Commission has prepared a draft proposal
amending the harmonised VAT rules to provide for time-of-supply rules in respect of
vouchers. 842 The proposal draws a distinction between payment methods on the one
hand, and single and multiple purpose vouchers on the other.
4.3.3.1 Payment methods
839
44
840
44
841
44
842
Common System of Value Added Tax, as Regards the Treatment of Vouchers
ed/com(2012)206_en.pdf [accessed on 16 October 2012].
175
Innovation in payment methods has blurred the distinction between vouchers in the
strict sense, and instruments akin to vouchers which are used to make payments. It
is proposed that the instruments that are currently used to make payments at
different unrelated outlets, and which are currently not treated as vouchers, should
retain their current status. 843 So, for example, where a shopping mall voucher is
issued entitling the user to spend the amount of credit on the voucher card at any of
the shops in the mall, the voucher is treated as a payment instrument similar to a
bank card. For VAT purposes, the intrinsic nature of the voucher should be
determined in order to classify it as either a voucher or a mere payment
instrument. 844 A stored value card or prepaid credit card, entitles the holder to goods
and services upon the payment of such goods or services by means of the stored
value card or prepaid credit card, thus rendering it a mere payment method. 845 In
contrast, the redemption of a voucher is not a substitutive payment, but the exercise
of a right to goods and/or services. 846
Modern technology, in particular in the cellular phone industry, has made the
distinction between vouchers and payment methods increasingly difficult to establish.
Traditionally, prepaid airtime vouchers are treated as vouchers because the voucher
entitles the holder to a right to claim airtime against the value of the voucher. 847
Currently, the holder of the voucher can use the airtime to purchase music, software,
843
844
845
846
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Van der Corput W (2010) Astra Zeneca- The VAT
Treatment of Vouchers International VAT Monitor vol 21 no 5 at 368.
847
ed/com(2012)206_en.pdf [accessed on 16 October 2012].; Van der Corput W (2010) Astra Zeneca- The VAT
176
make money transfers, pay for parking, or purchase goods from a vending
machine. 848 Where the voucher facilitates both the right to goods and services and is
also a payment instrument, it becomes difficult to classify it as a voucher. 849 It is
suggested that where an instrument carries the characteristics of a voucher but is
predominantly designed as a payment system, it should not be treated as a
voucher. 850
4.3.3.2 Single-purpose vouchers (SPV)
A single-purpose voucher is a voucher that carries a right to receive the supply of

goods or services where the suppliers identity, place of supply, and the applicable
VAT rate for the supply of goods or services is known at the time of issue of the
voucher. 851 In the case of an SPV, the issuing of the voucher and the supply of the
goods and services, are regarded as a single transaction. 852 Simply put, the
transaction is not taxed when the voucher is issued and when the voucher is
848
Common System of Value Added Tax, as Regards the Treatment of Vouchers at 6-7
849
850
Treatment of Vouchers International VAT Monitor vol 21 no 5 at 368-369.
851
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Rodrigues A and Lambourne M (2012) Towards
Clarification of the EU VAT Treatment of Vouchers International VAT Monitor vol 23 no 4 at 239; Cowly R
(2012) European Commission Review of VAT on Vouchers Irish Tax Review vol 25 no 3 at 98.
852
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Shaw S (2012) VAT on Face Value Vouchers- The
Lebara-case Tax Planning International European Tax Service vol 14 no 6 at 4
http://ibfd.ent.sirsidynix.net.uk/custom/web/SD_PDF/scans/2012/T/TPETS/6_22-25.zip [accessed on 23
January 2013].
177
exchanged for goods or services. The proposed amendment to article 65 of Council

Directive 2006/112/EC, provides that the SPV shall be taxed when it is issued and
paid for. 853 This means that when the voucher is exchanged for goods or services,
the supply of the goods and services is not taxed as tax has already been levied
when the voucher was issued. The proposal is consistent with the decision in Lebara
Ltd v The Commissioners for Her Majestys Revenue and Customs 854 where the ECJ
ruled that in case of an SPV, the operator of telecommunications services does not
carry out a second supply of services for consideration when the purchaser of the
voucher exchanges it for telecommunication services. 855 This is a departure from the
current treatment of SPVs in many Member States. 856
Since SPVs are taxed upfront, any subsequent distribution thereof will not create any
tax issues. Where the voucher and the subsequent goods and services are not
supplied within the same organisation (for example a prepaid telecommunication
voucher), the proposal could lead to double taxation: The voucher is taxed by the
issuer and the supply is taxed by the supplier. 857 Should the voucher be treated as a
payment method, only the subsequent goods or services will be taxed when the
voucher is exchanged. 858 Revenue losses could, however, result where the voucher
is never redeemed or is lost. 859 However, in these cases no goods or services were
supplied and the result would be similar to when cash is lost or not exchanged for
goods and services. The current proposal does not provide for an adjustment when
853
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Rodrigues A and Lambourne M (2012) Towards
Clarification of the EU VAT Treatment of Vouchers International VAT Monitor vol 23 no 4 at 238.
854
Lebara Ltd v The Commissioners for Her Majestys Revenue and Customs Case C520/10 (2012)
(unpublished).
855
Lebara Ltd v The Commissioners for Her Majestys Revenue and Customs Case C520/10 (2012)
(unpublished); Rodrigues A and Lambourne M (2012) Towards Clarification of the EU VAT Treatment of
Vouchers International VAT Monitor vol 23 no 4 at 238.
856
Cowly R (2012) European Commission Review of VAT on Vouchers Irish Tax Review vol 25 no 3 at 98.
857
Van Vught YM and Edie M (2007) Thats the Card to Play to Treat Prepaid Telephone Cards International
VAT Monitor vol 18 no 3 at 170.
858
Van der Corput W (2010) Astra Zeneca- The VAT Treatment of Vouchers International VAT Monitor vol 21
no 5 at 369.
859
no 5 at 368.
178
the voucher is lost or not redeemed. 860 Clearly, when the voucher is not redeemed,
an adjustment should be allowed as the consideration received was not in respect of
goods or services supplied. 861 Suppliers could rely on Socit thermale dEugnieLes-Bains v Ministre de lconomie, des Finances et de lIndustrie 862 where the
ECJ ruled that the forfeiture of a deposit for future services does not constitute
consideration for goods or services for which VAT must be levied. 863
4.3.3.3 Multi-purpose vouchers (MPV)
The proposed amendment to the Draft Council Directive defines a multi-purpose

voucher as any voucher, other than a discount or rebate voucher, which does not
constitute a single-purpose voucher. 864 The holder of an MPV is entitled to a right to
the supply of goods and services but, in contrast to an SPV, the supplier, place of
supply, and applicable VAT rate cannot be identified upfront when the voucher is
issued. 865 An example is a hotel chain that issues breakfast vouchers to patrons
which can be redeemed at any of the hotels or restaurants within the chain. 866 A
860
Rodrigues A and Lambourne M (2012) Towards Clarification of the EU VAT Treatment of Vouchers
International VAT Monitor vol 23 no 4 at 240; Cowly R (2012) European Commission Review of VAT on
Vouchers Irish Tax Review vol 25 no 3 at 99.
861
862
Socit thermale dEugnie-Les-Bains v Ministre de lconomie, des Finances et de lIndustrie Case C277/05 (2007) ECR I-6415.
863
Socit thermale dEugnie-Les-Bains v Ministre de lconomie, des Finances et de lIndustrie Case C277/05 (2007) ECR I-6415 at para 36.
864
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Cowly R (2012) European Commission Review of
VAT on Vouchers Irish Tax Review vol 25 no 3 at 98.
865
European Commission (2012) Draft proposal a Council Directive Amending Directive 2006/112/EC on the
866
179
further example is where an airtime prepaid voucher is issued that can be redeemed
for telecommunication services or for public transport. 867
VAT will not be charged when the MPV is issued or during the supply chain when the
voucher changes hands. 868 VAT is levied only when the voucher is redeemed or
partially redeemed. 869 In other words, the goods and services supplied in redemption
of the voucher, are taxed at the right place and at the correct rate when the goods or
services are supplied. Any profit or margin during the distribution chain of the MPV
will be subject to VAT each time a distribution service is supplied, i.e. each time the
MPV changes hands. 870 The advantages of treating vouchers as money, are that
retailers can account for VAT in accordance with the tax regime that applies to the
supplies, and no adjustments are required if the vouchers are lost or used for goods
or services that are subject to a different VAT rate than that envisaged when the
voucher was issued. 871
The proposal does not require that a physical voucher be issued to the customer. In
other words, a voucher can be issued as a physical document or card, a text
message, or a mere acknowledgement that the customers account has been
credited with a certain amount.
867
868
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Shaw S (2012) VAT on Face Value Vouchers- The
Lebara-case Tax Planning International European Tax Service vol 14 no 6 at 4
http://ibfd.ent.sirsidynix.net.uk/custom/web/SD_PDF/scans/2012/T/TPETS/6_22-25.zip [accessed on 23
January 2013].
869
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Van Vught YM and Edie M (2007) Thats the Card to
Play to Treat Prepaid Telephone Cards International VAT Monitor vol 18 no 3 at 168-169.
870
871
no 5 at 368.
180
In the case of B2C transactions, the non-EU supplier (and from January 2015 the EU
supplier) must levy VAT on the digital supplies at the rate applicable in the country
where the customer resides. This should be contrasted with the South African
position where the onus is on the recipient (customer) to levy VAT on the transaction
in terms of the reverse-charge mechanism. In the case of pre-paid automated
transactions (for example, software updates) the customer is often unaware of the
time when the supplies were made, especially where invoices are seldom issued.
Compliance in terms of the reverse-charge mechanism becomes unduly complicated
where the customer cannot determine the time of supply, or where the customer is
often unaware that a supply has been rendered. Who better to know when the
supplies were rendered than the supplier himself?
In the case of post-pay automated transaction, the general time-of-supply rules apply
in that the supplier must levy VAT when the services are rendered. Here, too, the
supplier is in the best position to determine when services are rendered.
From a compliance perspective, the general time-of-supply rules, and the draft
amendments in respect of vouchers, are fairly simple to apply, provided that a
reverse-charge mechanism is not enforced on consumers in the case of B2C
transactions. That said, the proposals in their current form still do not resolve all the
problems and contain too many loose ends. 872
4.3.4 What is the value of the supply
The general rule in the case of the supply of goods and services provides that the
taxable amount is everything that constitutes consideration obtained, or to be
obtained, by the supplier in return for the supply to the customer or any third party,
and shall include any subsidy directly linked to the price of the supply. 873 There are
no special rules pertaining to imported services or electronically supplied services.
872
873
Article 73 of Council Directive 2006/112/EC.
181
The taxable amount shall include taxes, duties, levies and any other charges but
excluding the VAT itself. 874 It is not certain whether the exclusion of VAT in article 78
refers to the VAT to be levied for VAT purposes in the applicable Member State, or if
it also refers to VAT that might have been levied at the country of origin in the case
of imported services where the origin principle applied. It is trite that, in order to avoid
double taxation, the value to be used to calculate VAT is the value of the goods or
services stripped from any VAT previously paid on the supply. To avoid unintended
double taxation, therefore, VAT exclusion in article 78 should be interpreted to refer
to any VAT that was previously levied, including the VAT still to be levied, on the
supplies. However, where, during the supply chain the supplies were themselves
exempt, VAT stripping will not occur. In these cases, VAT is likely to be shifted
forward in higher prices.
Also included in the price, where such costs are incidental to the supply, is any
commission, packing, transport or insurance charged by the supplier to the
customer. 875 Where these costs are not intrinsic to the cost of the services acquired,
they shall be treated as a separate transaction that will be subject to VAT in its own
right.
4.3.4.1 Imported goods
The value in respect of electronically ordered but physically delivered goods shall be
the value for customs purposes determined in accordance with the Community
provisions in force. 876 Included in the value of the imported goods are any taxes,
levies or charges due outside of the Member State, levies due as a result of
importation, but excluding the VAT to be levied. 877 The exclusion of VAT to be
levied potentially creates the opportunity for double taxation. It is clear that the
874
Article 78(a) of Council Directive 2006/112/EC.

Article 78(b) of Council Directive 2006/112/EC.
876
877
Article 86(1)(a) of Council Directive 2006/112/EC.
875
182
phrase is intended to exclude from the value on which VAT will be levied, the VAT
that is being calculated and levied on the value for present purposes. In other words,
any VAT that was previously paid on the value of the goods in the country of origin
where that country follows the origin principle, is included in the current value on
which EU VAT is to be levied, thus allowing for VAT to be charged twice. Goods
imported from countries applying the origin principle, or where exports are not
exempted from VAT, are at a disadvantage to products imported from countries that
are subject to EU VAT only. In the light of the fact that cross-border trade is
becoming more accessible as a result of e-commerce, the potential double taxation
regime could cause market distortions.
In addition, incidental expenses such as commission, packing, transport and
insurance costs up to the first place of destination in a Member State, and such costs
resulting from transportation to any other destination within the EU where that
destination is known at the time when VAT is to be levied, shall be included in the
value of the goods. 878 Where these costs are not incidental to the supply, in other
words where the services are supplied separately, they shall be treated as separate
supplies and shall be subject to VAT in their own right.
4.3.4.2 Vouchers
At present neither the Sixth Directive nor Council Directive 2006/112/EC provides for
rules determining the value for VAT purposes where vouchers are used. For
example, where a telecommunication voucher was issued to a customer for
consideration of Euros 80, but the intrinsic value of the voucher is Euros 100, which
value should be used to determine VAT? Similarly, where the credit on the voucher
can be exchanged for different goods and services, should the value of the voucher
be taxed, or should the value of the goods and services that were acquired be
878
Article 86(1)(b) of Council Directive 2006/112/EC.
183
taxed? In this case it is necessary to discuss the proposals on the VAT treatment of
vouchers in the Draft Council Directive 2006/112/EC. 879
In the case of an SPV, VAT is levied on the amount paid for the voucher at the time
of issue irrespective of the intrinsic value of the voucher. 880 Where the voucher is
further distributed against a fee or commission, the value of the fee or commission is
subject to VAT. 881
In the case of an MPV, the type of supply and applicable VAT rate cannot be
determined upfront when the voucher is issued. The value of the goods and services
acquired in exchange for the voucher are used to calculate VAT. 882 This can,
however, create a problem when the MPV reaches the customer through a
distribution chain. Each time that the voucher changes hands, a taxable service
occurs. The distribution can be spread over several Member States, and calculating
the value of the added service in the absence of an intrinsic value for the voucher
(the value of which is determined on redemption) is extremely cumbersome. For this
reason, the European Commission proposes that a nominal value be established
when the voucher is issued. 883 The value of the goods and services acquired when
the voucher is redeemed, is then limited to the nominal value attached to the
879
European Commission (2012) Draft proposal a Council Directive amending Directive 2006/112/EC on the
common system of value added tax, as regards the treatment of vouchers
880
881
882
European Commission (2012) Draft proposal a Council Directive amending Directive 2006/112/EC on the
common system of value added tax, as regards the treatment of vouchers at 5
883
184
voucher when it was first issued. 884 Simply put, the nominal value represents the
taxable value irrespective of the value of the goods and services supplied in
exchange for the voucher. The value of the margin/commission or service fee added
to the voucher, is taxable in its own right when the voucher exchanges hands. 885
4.3.4.3 Discount vouchers
Discount vouchers, other than vouchers acquired against payment, entitle the holder
to goods and services at a discounted price. At present, Council Directive
2006/112/EC provides that the value of any price reduction, discount, or rebate
should be deducted from the value before VAT is levied. 886 Consequently, VAT
should be levied on an amount that reflects the actual consideration received. 887
Where one person both issues and redeems the voucher, the calculation for VAT
purposes is fairly uncomplicated. For example, where X grants Y Euro 5 discount on
a Euro 100 garment, X only accounts for VAT on Euro 95. In practice, however,
discount vouchers are often issued by the manufacturer or wholesaler and redeemed
by the customer at a retailer. In addition, the vouchers are often redeemed in
Member States other than the Member State of issue.
In Elida Gibbs Ltd v Commissioner of Customs and Excise, 888 the court ruled that
where a customer presents a voucher that was issued by a person other than the
seller, entitling him to a rebate or a discount on submitting proof of purchase of
specific items, the value of the goods for VAT purposes shall be the value paid for
884
885
886
Article 79 of Council Directive 2006/112/EC in the case of the supply of goods and services, and article 87 in
the case of imported goods.
887
Bijl J (2012) VAT: Money Off Vouchers and Cash Back Schemes-What are the Problems and How Can
they be Solved? EC Tax Review vol 21 issue 5 at 263.
888
Elida Gibbs Ltd v Commissioner of Customs and Excise Case C-317/94 (1996) ECR I-05339.
185
the goods less as much as represents the discount. This principle was confirmed in
Commission of the European Communities v The Federal Republic of Germany 889
where the court ruled that the value used to calculate VAT cannot be more than the
consideration paid by the customer. This position is, however, inconsistent with the
harmonised VAT laws. 890 The European Commission is of the view that the ECJ
interpretation results in cumbersome administration and that it is difficult to follow. 891
It is further of the view that the ECJs interpretation offers no easy solution,
especially where the voucher is issued in one Member State and redeemed in
another. 892 What happens where the issuer is not the source of the refund? The
European Commission proposes that the voucher should not be seen as third party
payment, but should be treated as part of the consideration. 893 Rather than reducing
the consideration by the value of the voucher, the manufacturer or issuer thereof
deducts the input VAT thereon on redemption of the voucher. 894 In other words, the
purchase price is still reduced by the value of the discount voucher and VAT is paid
on that value only, but instead of issuing an invoice for the full amount reflecting the
payment by voucher and cash, the invoice is only issued for the reduced amount. 895
889
Commission of the European Communities v The Federal Republic of Germany Case C - 427/98 (2002) ECR I08315.
890
891
892
893
894
ed/com(2012)206_en.pdf [accessed on 16 October 2012]; Bijl J (2012) VAT: Money Off Vouchers and Cash
Back Schemes-What are the Problems and How Can they be Solved? EC Tax Review vol 21 issue 5 at 266, 269.
895
186
4.3.4.4 No consideration paid
In principle, VAT cannot be paid on a value greater than the consideration paid by
the customer. 896 Where no consideration is paid, or where the consideration is lower
than the open market value, the open market value of the supplies may be used to
calculate VAT to prevent tax evasion or avoidance in respect of the supply of goods
and services involving family or other close personal ties, management, ownership,
membership, or financial or legal ties. 897 In contrast to the provisions in the South
African VAT Act, 898 the Council Directive provides for a wider range of connected
persons. Where, for example, X receives every third software update free as a result
of his membership of a loyalty scheme, the discount so offered could be classified as
an agreement between connected persons (members of a loyalty scheme). In this
case, however, where no intention exists to avoid or evade taxation, the value of the
free digital supplies should be regarded as nil for VAT purposes. It should further be
noted that Member States are allowed to limit the scope of the meaning of connected
persons for purposes of article 80. 899 Basu points out that, generally, where no
consideration is paid, VAT is not levied. 900 As a result, no tax can be collected on
free downloads, free information, or free access to the Internet. 901
A common problem that is further exacerbated by technological advances, is the
illegal sharing of files on the Internet. Various cases have hinged on the question of
the taxation of illegal transactions for VAT purposes. Generally, the ECJ has applied
the principle of tax neutrality to tax illegal supplies902 except in those cases where
896
Commission of the European Communities v The Federal Republic of Germany Case C - 427/98 (2002) ECR I08315; Staatssecretaris van Financin v Association cooprative Coperative Aardappelenbewaarplaats GA
Case C154/80 (1981) ECR I-00445.
897
Article 80(1) of Council Directive 2006/112/EC.
898
Act 89 of 1991.
899
900
http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October 2012].
901
902
Town and County Factors Ltd v Commissioners of Customs and Excise Case C498/99 (2002) ECR I-07173; Karlheinz Fischer v Finanzamt Donaueschingen Case C-283/95 (1998) ECR I-03369;
R v Goodwin & Unstead Case C-3/97 (1998) ECR I-3257; Staatssecretaris van Financin v Coffeeshop "Siberi"
vof Case C-158/98 (1999) ECR I-03971.
187
the intrinsic nature of the illegal goods was so detrimental 903 that national laws
provided for an outright ban of the goods. 904 Generally, digital supplies infringing
rights of a third party, such as a copyright holder, would be an unlawful supply falling
within the scope of VAT. 905 However, in these cases the illegal transactions in
question involved the supply of goods and services for consideration. In the case of
illegal file sharing, consideration is not paid. In limited cases users of the service pay
a nominal membership fee, but the actual file downloads are available free of
charge. In Staatssecretaris Financin v Hong Kong Trade Development Council, 906
the ECJ ruled that a person who makes supplies of goods and services at no charge,
is not a taxable person. 907 Accordingly, VAT cannot be charged on a transaction
where no consideration is paid. In RJ Tolsma v Inspecteur der Omzetbelasting
Leeuwarden, 908 the ECJ ruled that the uniform basis of taxation, provided for in
article 2(1) of the Sixth Directive, does not include the consistent playing of music on
the highway for which no remuneration is stipulated, even if the musician uses this
means to solicit money. 909 Therefore, the illegality of the file sharing does not prohibit
the VAT-ability thereof. However, the fact that no consideration is paid for the
supply excludes it from the application of VAT. Rendahl opines that the absence of
a direct link and legal relationship between the supplied services and the
consideration received (or absence of consideration) excludes illegal file sharing
from the VAT sphere. 910 Where the recipient is a member of a group of file sharers to
which he pays a nominal membership fee, the membership fee could be subject to
VAT. It could further be argued that, as a result of the membership status, the open
market value of the supplies should be subject to VAT under the connected
persons provision in article 80. Determining the open market value of illegal
downloads can be problematic. It is arguable whether a reasonable purchaser is
willing to pay for illegal downloads in an open market. Generally, the open market
903
Vereniging Happy Family Rustenburgerstraat v Inspecteur der Omzetbelasting Case C289/86 (1988) ECR I-03655.
904
Van Zyl SP (2011) The Value Added Tax Implications of Illegal Transactions PELJ vol 14 no 4 at
340 http://www.nwu.ac.za/webfm_send/4734 [accessed on 5 September 2012].
905
Rendahl P (2011) Imposing EU VAT on Unlawful Digital Supplies EC Tax Review vol 20 issue 4 at 198.
906
Staatssecretaris Financin v Hong Kong Trade Development Council Case C-89/81 (1982) ECR I-1277.
907
Staatssecretaris Financin v Hong Kong Trade Development Council Case C-89/81 (1982) ECR I-1277 at para
13.
908
RJ Tolsma v Inspecteur der Omzetbelasting Leeuwarden Case C-16/93 (1994) ECR I-0743.
909
RJ Tolsma v Inspecteur der Omzetbelasting Leeuwarden Case C-16/93 (1994) ECR I-0743 at para 20.
910
Rendahl P (2011) Imposing EU VAT on Unlawful Digital Supplies EC Tax Review vol 20 issue 4 at 202.
188
value of illegal downloads is zero. Caution should be applied not to tax the intrinsic
value of the intellectual property of the supplies as a punitive measure where
national laws fail adequately to penalise and prohibit the illegal behaviour.
4.3.4.5 Currency issues
At present different currency conversion rules apply in some Member States. This
can become an obstacle for cross-border traders who must account for VAT in the
currency of the country where the customer is located. 911 This can best be illustrated
by way of example:
Example 4.3: A foreign supplier (X) opted to register as an EU vendor in
the Netherlands and accounts for VAT in the Netherlands in Euros. X
supplies digital products to various customers across the European Union
including Denmark, Sweden, and the Czech Republic. When rendering the
supplies, X must charge VAT at the applicable rate and in the currency of
the Member State where the customer is established. At the time of
writing, the currencies of Denmark (Danish Krone), Sweden (Swedish
Kronor), and the Czech Republic (Czechs Koruna) differed. X has to levy
VAT on the value and in the currency of the country where the customer is
established, but accounts for VAT on the value and in Euros in the
Netherlands where it has opted to be established. Since the currency
conversion rules between these countries differ, it would be impossible for
X to account accurately for VAT on his total sales.
The Director-General for internal policies has suggested that, while a need for
currency conversion still exists, harmonised currency conversion rules should be
established. 912 In this regard it should be noted that article 366(2) of Council
911
45.
912
45.
189
Directive 2006/112/EC provides that the exchange rate published by the European
Central Bank on the last day of the tax period shall apply. However, using this
conversion method would result in different figures appearing in the tax return and
the actual supplies. How the EU plans to resolve the currency conversion issues
remains uncertain.
4.3.5 Is the supply made by a taxable entity?
While it is trite that the consumer (or the act of consumption) bears the ultimate
burden of VAT, it is not always the final consumer that accounts for VAT to revenue
authorities. The general rule defines taxable person as ...any person who, independently, carries out in any place any economic activity,
whatever the purpose or result of that activity.
913
This definition is particularly wide and identifying the taxable person who has to
account for VAT to revenue authorities cannot be accurately done. The verification of
the taxable status of a person or entity is of utmost importance in cross-border trade
to determine who is accountable for VAT. Council Directive 2006/112/EC does not
provide clear rules by which to identify the taxable person. Identifying the taxable
entity relies of the place-of-supply rules that were developed for the different types of
transaction within the framework of electronically supplied services.
4.3.5.1 B2B transactions between EU vendors
In the case of intra-community transactions between VAT vendors, VAT is levied in

terms of the reverse-charge self-assessment mechanism 914 on the recipient vendor
913
914
The reverse-charge mechanism in this context should be distinguished from a self-assessment mechanism
in the case of B2C transactions as it is called in the EU. See Bird RM and Gendron PP (2007) The VAT in
Developing and Transitional Countries at 139.
190
at the VAT rate in the country where it is established. 915 This means that the supplier
vendor who is established in one Member State and who renders electronically
delivered supplies to a recipient vendor in another Member State, need not account
for VAT on the supplies in the country of origin. As the taxable entity, the recipient
vendor must account for VAT in the Member State in which it is established. That
said, Rendahl notes that where the goods acquired are not used as part of the
recipient vendors economic activity (in the making of taxable supplies) the
transaction should, in principle, be treated as a supply of electronically delivered
products to a non-taxable person (discussed in paragraph 4.3.5.3 below) irrespective
of the recipients vendor status. 916 The supplier vendor cannot know whether the
supply will be used as part of the recipient vendors economic activity and it is not
required to investigate such use. 917 Therefore, under the reverse-charge mechanism
any such private or domestic use would be subject to VAT and no input VAT
deduction would be allowed. The supplier vendor merely has to establish, in the
place of establishment, the VAT vendor status of the supplier to be able to disregard
any further VAT obligations in the Member State of origin. 918
4.3.5.2 B2B transactions between a foreign supplier and an EU vendor
Parrilli points out that, before the amendment of article 44 of Council Directive
2006/112/EC, 919 article 56 provided that where electronically supplied services are
915
Article 56(1) read with article 196 of Council Directive 2006/112/EC; Ward BT, Sipior JC, Bremser W,
McGinty DB (2006) A Comparison of United States and European Union Taxation of E-commerce ICEC 06
Proceedings of the 8th International Conference on Electronic Commerce at 346; Henriques V, Azevedo L,
Bonnet J, Carvalho P, Mathan L (2001) Extending VAT to E-commerce: an Implementation of EU Proposals
Euroweb 2001 at 3; Bleuel J and Stewen M (2000) Value Added Taxes on Electronic Commerce: Obstacles to
the EU Commissions Approach Intereconomics July/August at 156; Basu S (2002) European VAT on Digital
Sales Journal of Information, Law and Technology issue 3 http://elj.warwick.ac.uk/jilt/02-3/basu.html
[accessed on 5 October 2012]; Rendahl P (2007) An Overview of Consumption Tax Implications on Sale of
Digital Downloads in the European Union Journal of Media Business Studies vol 4 no 2 at 91.
916
917
European Union Journal of Media Business Studies vol 4 no 2 at 74-75.
918
919
As amended by Council Directive 2008/8/EC with effect from 1 January 2010.
191
rendered to an EU VAT vendor by a non-EU supplier, the EU VAT vendor was,

under the reverse-charge mechanism, required to account for VAT in the country
where it was established. 920 However, article 56 actually provided for transactions
where the taxable person (recipient vendor) was established in the Community but
not in the same country as the supplier. Therefore, strictly speaking, article 56
provided for transactions between taxable persons (vendors) who were both
established within the EU, albeit in different Member States. No provision was made
to identify the taxable person where a foreign supplier rendered electronically
delivered supplies to an EU vendor.
Article 44 as amended by Council Directive 2008/8/EC, provides that the taxable
person, in the case of supplies by a non-EU vendor to an EU vendor shall be the EU
vendor under the reverse-charge mechanism. 921
4.3.5.3 B2C transactions between an EU vendor and EU non-vendor

4.3.5.3.1 The position from 1 January 2006 until 31 December 2009
Council Directive 2006/112/EC does not provide for specific place-of-supply rules in
the case of electronically supplied services between an EU vendor and an EU
consumer (non-vendor). The general rule, namely that the place of supply shall be
the place where the supplier is established, applies. 922 From the place-of-supply rule
it can be deduced that the taxable entity shall be the supplier vendor. Under the
general rule, the supplier must account for VAT on the supplies in the country of
establishment at the VAT rate applicable in that country. 923 Suppliers who are
920
Parrilli DM (2009) Electronically Supplied Services and Value Added Tax: The European Perspective
Journal of Internet Banking and Commerce vol 14 no 2 at 10.
921
922
923
192
established in jurisdictions with a low VAT rate (such as Luxembourg), are placed at
an advantage over other vendors. 924
4.3.5.3.2 The position from 1 January 2010 until 31 December 2014
The amendments envisaged by Council Directive 2008/8/EC that applies from 1

January 2010 until 31 December 2014, also do not provide for specific place-ofsupply rules for electronically supplied services between an EU vendor and an EU
consumer (non-vendor). The general rule, as amended, applies. The amended
version of article 45 defines the place of supply of services to non-taxable persons
within the EU as the place where the supplier is established. 925 It further provides
that where the supply is rendered from a fixed establishment located at a place other
than the place where it has established its business, such place of fixed
establishment is deemed to be the place of supply. 926 It can, therefore, be deduced
that the taxable person is the supplier vendor (head office) in so far as the supplies
are made from the place where it has established its business. Where the supplies
are made from a fixed location (branch) other than the place where the business is
established, that branch of the supplier is the taxable entity. The supplier shall
account for VAT at the rate applicable in the country where it is established, or in the
country where the branch from where the supplies are made has its fixed
establishment, or where it resides. This amendment allows suppliers to set up
establishments in low VAT jurisdictions and to distribute supplies from those
branches to avoid the unfair tax advantage explained in paragraph 4.3.5.3.1 above.
Nonetheless, it should be noted that smaller companies may not have the capital or
resources to establish branches in various jurisdictions and are still placed at a
disadvantage.
924
Int Veld TFG (2007) E-commerce en het Gebrek aan Fiscal Aanknopingspunten Weekblad Fiscale Recht
vol 136 no 6719 at 512.
925
926
193
4.3.5.3.3 The position after 1 January 2015
The new article 58 as envisaged by the amendments to Council Directive 2008/8/EC

which will apply from 1 January 2015, provides that in the case of electronically
supplied services, the place of supply to any non-taxable person shall be the place
where the non-taxable recipient is established, has his permanent address, or
resides. Since the reverse-charge mechanism only applies to B2B transactions, it
can be deduced that the supplier of the electronically supplied services is the taxable
entity. The supplier must account for VAT in the country where it is established or
from where the supplies are made 927 at the VAT rate applicable in the country where
the recipient is established, has a fixed address, or resides. 928 The supplier vendor is
not required to register as a VAT vendor in each Member State in which it makes
taxable supplies, but accounts for VAT in the preferred Member State of
establishment. 929 The vendor is still required to identify the customers Member State
of residence to levy VAT at the correct applicable rate. This - as discussed in
paragraph 4.3.2.2.4 - is a difficult hurdle to overcome and it is not certain to what
lengths the supplier must go to verify the customers location with absolute certainty.
Should technology not be useful in coming years to resolve this problem, EU
suppliers will face the same issues that non-EU suppliers have been facing since
2002. 930
Prior to the amendment, the EU vendor was required to apply VAT at a single rate
only. The amendment will require the vendor to levy VAT at 27 931 different VAT
rates. Come 2015, suppliers will have to apply new accounting methods and
expensive software to levy VAT at the appropriate rate and adequately reflect it in
their VAT returns. This amendment will bring an end to the current discrimination
927

Article 58 of Council Directive 2008/8/EC applicable from 1 January 2015.
929
Article 369a of Council Directive 2008/8/EC applicable from 1 January 2015. Also see VAT collection
mechanisms in paragraph 4.3.7 below.
930
931
At the time of writing the EU consisted of 27 Member States.
928
194
between EU and non-EU suppliers. 932 However, Parrilli points out that instead of
creating legal tools to abolish or reduce the difficulties currently faced by non-EU
suppliers, the legislator has extended the application to EU vendors. 933 Parrilli is
doubtful whether technology will advance to such an extent that it will be able to
assist vendors in resolving the issue of locating the customer with accuracy and
taxing him accordingly. 934 It could be argued that as the proposed amendments have
been available since 2008, EU suppliers have been given ample time to develop
appropriate software. That said, the development of software is no guarantee that
the problem will be solved, especially in cases where the recipient applies software
that would prevent the suppliers software from locating his place of residence.
4.3.5.4 B2C transactions between a foreign supplier and an EU non-vendor
Before the VAT reform of electronically supplied services by Council Directive

2002/38/EC, the place-of-supply rules provided that the supply was deemed to be
made in the country of origin in the case of services. Accordingly, the taxable person
was identified as the supplier who accounted for VAT in the country of origin if VAT
or any other sales tax was to be levied on the supply. This resulted in a competitive
disadvantage for EU suppliers and further caused market distortions. 935
Article 57 936 of Council Directive 2006/122/EC provides that the place of supply, in
the case of electronically supplied services where the supplier is a foreign non-EU
vendor which makes supplies to a customer resident in the EU, is the location where
the customer is established, has a fixed address, or resides. Since the reverse932
933
934
935
Raponi D (2000) VAT Treatment of Electronically Delivered Services EC Tax Review vol 9 issue 3 at 188189; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 209.
936
Article 57 applied between 2002 and 31 December 2009 when it was replaced by article 58 of Council
Directive 2008/8/EC which will apply from 1 January 2010 until 31 December 2014. Article 58 will be replaced
by the amended article 58 which will apply from 1 January 2015. The outcome of the provisions is the same in
respect to identifying the place of supply and the taxable entity in the case of B2C transactions between a
foreign non-EU vendor and an EU customer.
195
charge mechanism does not apply to non-taxable persons, the non-EU supplier must
collect EU VAT on its supplies. 937 In contrast to the vague South African position, EU
legislation is clear: A foreign supplier must levy and account for EU VAT when it
makes digital supplies to customers located within the EU. Furthermore, unlike the
South African position, foreign suppliers are not required to have a physical
presence in the EU to register as VAT vendors. 938
The position until 31 December 2014 places foreign suppliers at a disadvantage
when compared to EU suppliers in that foreign suppliers must account for VAT at the
rate applicable in the country where the customer is established, while the EU
supplier levies VAT at the rate applicable in the Member State of origin. In addition,
foreign suppliers are required to identify the customers place of residence (and not
the location at the time of conclusion of the contract) to levy VAT at the appropriate
rate. This cannot be determined with absolute accuracy and the process places a
significant administrative and technological burden on suppliers. 939 Determining the
customers place of residence often relies on the honesty and integrity of customers.
Hardesty opines that only a minority of customers would apply technology to mask
their identity and location. 940 Generally, this might be the case, but consumers
acquiring and applying sophisticated masking technology often do so to avoid paying
taxes on transactions that would, under normal circumstances, be subject to VAT
amounting to substantial amounts.
Should the transaction be under- or over-taxed, the supplier could be subject to
penalties and interest. Even in cases where the customers place of residence can
be located with certainty, the foreign supplier must avail itself of the national VAT
legislation of the applicable country. It is not sufficient for the supplier to merely levy
VAT at the rate applicable to the country in question; it must classify the type of
supply correctly to enable it to levy the applicable VAT rate or to determine if the
937
Article 57 read with article 193 of Council Directive 2006/112/EC.

Journal of Internet Banking and Commerce vol 14 no 2 at 10; Basu S (2002) European VAT on Digital Sales
Journal of Information, Law and Technology issue 3 http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on
5 October 2012]. Vendor registration options are discussed in paragraph 4.3.7.
939
940
Hardesty D (2000) EU Continues Efforts to Tax Digital Products E-commerce Tax News 22 October
http://www.mail-archive.com/members@csmfo.org/msg01582.html [accessed on 29 October 2012].
938
196
supply is taxable at all. 941 In other words, the supplier must create 27 different VAT
scenarios for each of the different electronically supplied products942 that it supplies
to EU customers. Considering the fact that e-commerce transactions are automated
and that minimal human intervention is required, this burden would require
sophisticated and expensive software.
Parrilli points out that the best solution (until 31 December 2014) would be for foreign
vendors to establish a branch in an EU jurisdiction with a low VAT rate (Luxembourg,
for example) to enable them to enter the EU market at par with their EU counterparts. 943
Requiring non-EU established suppliers to collect EU VAT as taxable entities, has
been severely criticised since the draft amendment proposals were first released.
The EU legislator was especially criticised by American economists, politicians and
businessmen for possibly violating international tax treaties. 944 Hardesty opines that
the EU principles could set a trend that could be followed by other countries around
the world. 945 Not all jurisdictions are as organised and governed by uniform and
harmonised laws as are Member States of the EU. This could result in one supplier
effectively being held accountable for VAT in more than 100 different jurisdictions,
depending on its customer base. 946 For most suppliers this would be impossible and
costly to administer, forcing them to abandon existing cross-border trade.
Prospective e-tailers could be deterred from setting up businesses on a cross-border
trade platform. Basu points out that many e-tailers would continue rendering crossborder supplies resulting in an industry that would be known for non-compliance. 947
941
942
This presumption is based on the premise that not all digitally supplied products are taxed equally in
Member States.
943
944
US Deputy Secretary Kenneth Dam as quoted in Basu S (2002) European VAT on Digital Sales Journal of
Information, Law and Technology issue 3 http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October
2012].
945
946
At the time of writing the UN recognised 192 independent jurisdictions. See World Atlas How Many
Countries http://www.worldatlas.com/nations.htm [accessed on 29 October 2012].
947
197
It should be noted that this criticism is not aimed at the taxation of digital supplies by
foreign suppliers to EU customers as such, but at the provisions that deem the
foreign supplier to be the effective taxable person or entity. Since cross-border ecommerce is a global phenomenon, which is not restricted to transactions between
EU customers and non-EU suppliers, a global, rather than a regional solution should
be developed. Legislators and policy makers are not only faced with protecting the
tax base, but should further protect local markets from competing foreign untaxed
markets, 948 Further, in finding the balancing act, legislators and policy makers should
take cognisance of international trade trends and agreements so as not to violate
international agreements or distort international trade by overly harsh or cost
ineffective rules. 949
From a financial perspective, one could argue that the reverse-charge mechanism as
applied in South Africa - in terms of which the importer of the service is deemed to
be the taxable person - is the most favourable solution for international trade. This is
because the supplier would not be required to register as VAT vendor in the
recipients country of establishment and further incur VAT administration costs in that
country. 950 The ineffectiveness of the reverse-charge mechanism in collecting VAT
from the taxable persons or entities, could, however, cause the erosion of the tax
base.
A provision deeming the foreign supplier a taxable entity is beneficial in protecting
the tax base, but it negatively affects international trade which could, in the long run,
lead to international economic recessions. Caldwell interestingly points out that such
deeming provisions cannot protect the tax base as it would be impossible to detect
or audit these transactions thus nullifying arguments in favour of such provisions. 951
Due to the anonymity of e-commerce transactions, revenue authorities are
dependent on the integrity and honesty of the taxable person or entity.
948
949
950
Lamensch M (2012) Are reverse-charging and the one-stop-scheme efficient ways to collect VAT on
digital supplies? World Journal of VAT/GST Law vol 1 issue 1 at 3.
951
Caldwell F as quoted in Basu S (2002) European VAT on Digital Sales Journal of Information, Law and
Technology issue 3 http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October 2012].
198
Finding a solution to identify a taxable person in the case of cross-border B2C

transactions that would protect the tax base and promote international trade
therefore requires a global effort.
4.3.6 Is the supply made in the course and furtherance of an enterprise?
Under the EU VAT system the taxable person charges VAT on the supply of goods
and services to its customers and remits VAT minus any VAT inputs or credits on his
monthly or quarterly VAT return to tax authorities. 952 Conversely, VAT only
generates income to the fiscus if the VAT charged on a transaction cannot be
deducted by the purchaser. 953 Kogels opines that where transactions are concluded
between businesses or VAT-liable persons, the VAT burden is zero. 954 This is not
entirely correct. A VAT vendor is not always entitled to an input VAT deduction on
purchases. An input VAT deduction is only allowed in respect of goods and services
acquired by a vendor in the production of income, or in the furtherance of the
business. 955 Where the goods or services are utilised for private consumption, input
VAT cannot be deducted. 956 In the case of B2B cross-border transactions involving
electronically supplied goods, in terms of the place-of-supply rules, the vendor
recipient must account for VAT on the transaction in terms of the reverse-charge
mechanism. 957 Depending on the VAT rules in the Member State of fixed
establishment, the vendor must either account for VAT and immediately claim in
input VAT deduction, or treat the transaction as non-taxable in so far as the
electronically supplied services are utilised in the production of income. In other
952
Kogels HA (1999) VAT @ E-commerce EC Tax Review vol 8 issue 2 at 118; Wohlfahrt B (2011) The Future
of the European VAT System International VAT Monitor vol 22 no 6 at 388.
953
Kogels HA (1999) VAT @ E-commerce EC Tax Review vol 8 issue 2 at 118.
954
955
Article 168 of the Sixth Council Directive 77/388/EEC of 17 May 1977; Doernberg RL, Hinnekens L,
Hellerstein W, Li J (2001) Electronic Commerce and Multi-jurisdictional Taxation at 117; Wohlfahrt B (2011)
The Future of the European VAT System International VAT Monitor vol 22 no 6 at 388.
956
at 117.
957
at 118-119; Jeanmart FX (2001) Taxation of Electronic Commerce Part II:VAT Tax Planning International:
European Union Focus vol 3 no 8 at 7; Lejeune I, Korf R, Grnauer A (2003) New E-commerce Directives: A
Move Towards e-Europe? Journal of International Taxation vol 14 no 4 at 20.
199
words, the recipient of the supply must issue a self-billed invoice in case of B2B
transactions, irrespective of whether or not VAT is due on the transaction. 958 This
should be contrasted with B2B transactions in South Africa where the recipient
vendor is not required to account for VAT on imported services in so far as the
supplies acquired are utilised and consumed in the furtherance of an enterprise and
in the making of taxable supplies. Self-supply rules can supplement restrictions on
input VAT deductibility.
Suppliers are generally relieved of the obligation to verify how the customer
(business recipient) will actually use the services. 959 Once the customers VAT status
has been determined, the supplier is relieved of its duty to levy VAT on the supply.
Since the supplier has no control over the consumption of the supplies, the customer
vendor who consumes the supplies for private and domestic purposes must account
for VAT on the supply in terms of the reverse-charge mechanism. 960 That said, the
Implementing Regulations provide, that where, due to the nature of the supply, and
where no information to the contrary exists, certain supplies are deemed to be
privately consumed and must be taxed by the supplier irrespective of the business
status of the customer. 961 The Regulations, however, fail to give guidelines or
examples of cases where the nature of the supplies would indicate private and
domestic use.
As a result of the fraud opportunities under the current fractionated system, the
European Commission proposes a general application of a reverse-charge
958
Cervino G (2007) VAT and E-commerce International Tax law Review vol 3 at 140; Jeanmart FX (2001)
Taxation of Electronic Commerce Part II:VAT Tax Planning International: European Union Focus vol 3 no 8 at
7; Wohlfahrt B (2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at 393.
959
Business Issues Solved and is Certainty Provided? International VAT Monitor vol 22 no 3 at 148; Buydens S,
Holmes D, Owens J (2009) Consumption Taxation of E-commerce: 10 Years after Ottawa Tax Notes
International vol 54 no 1 at 62.
960
Jeanmart FX (2001) Taxation of Electronic Commerce Part II:VAT Tax Planning International: European
Union Focus vol 3 no 8 at 7; Buydens S, Holmes D, Owens J (2009) Consumption Taxation of E-commerce: 10
Years after Ottawa Tax Notes International vol 54 no 1 at 62; Wohlfahrt B (2011) The Future of the European
VAT System International VAT Monitor vol 22 no 6 at 393.
961
Article 19 of Council Implementing Regulation (EU) 282/2011 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF [accessed on 15 October 2012].
200
mechanism to all B2B transactions similar to the current Dutch system. 962 Under this
system, a VAT vendor must account for VAT on cross-border acquired digital goods
irrespective of whether the goods will be applied in the course and furtherance of its
enterprise. The vendor would, however, be entitled to an input VAT deduction in so
far as the goods are applied in the making of taxable supplies. Despite the additional
administrative burden, the European Commission is of the opinion that a general
application of a reverse-charge mechanism should not be ruled out. 963
4.3.7 Is the transaction taxable?
In addition to the burden of correctly classifying their supplies, suppliers of digital

products must also determine if the supplies could possibly fall under one or more of
the exemptions provided for in Council Directive 2006/112/EC. Member States are
allowed to develop and apply provisions exempting certain transactions, activities,
and entities from VAT within the framework of the harmonised exemption provisions
in Council Directive 2006/112/EC. 964 It is, therefore, not sufficient for suppliers to be
aware of the harmonised exemption rules alone when making supplies. This could
place a tremendous administrative burden (over and above the existing task of
collecting VAT in accordance with the VAT rate applicable in the customers country
of residence) on foreign suppliers who render digital supplies to EU customers.
Come January 2015, this administrative burden will be extended to EU suppliers who
make digital supplies to EU customers resident in a Member State other than the
Member State in which the supplier is established. Effectively, e-tailers are required
to become experts in the VAT legislation (or acquire the services of VAT experts) of
all the Member States in which they make digital supplies. Once a supplier becomes
aware of the complete compliance burden in a certain jurisdiction, it may well be
discouraged from establishing a market in that jurisdiction.
962
European Commission (2010) Green Paper on the Future of VAT: Towards a Simpler, more Robust and
Efficient VAT System COM(2010) 695 final at 8 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0695:FIN:EN:PDF [accessed on 21 January 2013].
963
964
201
Conflict exists between the list of electronically supplied services in Annex II, and the
exemption provisions of Council Directive 2006/112/EC. For example: In terms of
item 5 of Annex II, the supply of distance teaching is deemed to be an electronically
supplied service which is a taxable supply. In terms of article 132(1)(j), tuition given
privately by teachers and covering school or university education is exempt. Where a
teacher, in her capacity as supplier, supplies private tuition through distance
teaching, or in applying digital technology through an e-learning portal, the supply
can both be taxable and exempt. If, and to what extent, article 132(1)(j) will take
preference above the charging provisions is not certain. Englisch states that the
interpretation of exemptions is aggravated by the lack of a clear and consistently
implemented rationale for the majority of the exemptions for which provision is
made. 965 He further states that the ECJ has in the past implemented a strict
interpretation approach because exemptions should be seen as an exception to the
general rule. 966 As a result, where a supply, because of the exceptional
circumstances, complies with the requirements of the exemption, the supply should
be exempted from VAT. Multiple or combined supplies can further exacerbate the
issue as can be seen from the example below.
Example 4.4: A teacher, as taxable entity, develops and sells school
distance teaching models to private consumers in the EU. As part of the
supply, the teacher provides private tuition. The software and private
tuition are sold as a single supply at a single price.
Should the supply in example 4.4 be split to exempt the private tuition and tax the
distance teaching as separate supplies? If the single supply cannot be split, should
the whole of the supply be taxable or exempt?
In Everything Everywhere Ltd v Commissioners for Her Majestys Revenue and
Customs, 967 the ECJ ruled that from an economic point of view, a single supply
965
Englisch J (2011) EU Perspectives on VAT Exemptions Oxford University Centre for Business Taxation
Working Paper Series no 11/11 at 7 http://www.sbs.ox.ac.uk/centres/tax/papers/Documents/WP1111.pdf
966
967
Everything Everywhere Ltd v Commissioners for Her Majestys Revenue and Customs Case C-276/09 (2010)
ECR I-12359.
202
should not be artificially split for VAT purposes. 968 This is especially the case where
one or more elements of the supply constitutes the principal supply, while other
elements could be construed to be ancillary supplies. 969 In these cases it has been
suggested that the nature of the principal supply should be the determining factor. 970
In other words, where the principal supply is taxable and the ancillary supplies fall
under one or more exemption, the whole of the supply shall be taxable, and vice
versa.
Supplies by public postal services in so far as they do not entail passenger transport,
telecommunication services, or goods incidental thereto, are exempt. 971 Where a
postal service provides electronically supplied services as contemplated in Annex II,
the supplies should be exempt. It is not certain whether this exemption applies to
postal services in general, or only to postal services established in the EU. For
example, where a public postal service in the USA supplies web services, software,
and technical support to customers in the USA and Europe, can it be said that the
supplies made to EU customers should be exempt? The Council Directive does not
provide for the exemption of foreign supplied services if the supply would have been
exempt, had it been supplied in the Community. This should be contrasted with the
South African position, which provides that foreign supplied services would be
exempt from South African VAT only if the supply would have been exempt from
VAT had it been supplied in the Republic. 972
It should further be noted that different revenue authorities in the various Member
States can interpret the exemptions, and treat the conflict between Annexure II and
the exemptions differently. What constitutes an exempt supply in one Member State
could be construed to be taxable supplies by revenue authorities in another Member
State. This leads to tax uncertainty and taxable entities are effectively required to
968
Everything Everywhere Ltd v Commissioners for Her Majestys Revenue and Customs Case C-276/09 (2010)
ECR I-12359 at para 22.
969
970
Working Paper Series no 11/11 at 11-12 http://www.sbs.ox.ac.uk/centres/tax/papers/Documents/WP1111.pdf
971
Article 132(1)(a) of Council Directive 2006/112/EC.
972
203
familiarise themselves of the interpretation of exemptions in each Member State. In

the UK, for example, physical books are zero-rated (effectively not subject to VAT)
while e-books are subject to VAT at the standard rate since e-books are classified as
electronically supplied services. Sinyor points out that the word book should refer to
both printed and e-books as the both products meet the customers needs in the
same way. 973 That said, e-books, e-magazines, and e-newspapers can be
distinguished from their tangible counterparts as the e-version offers a wider variety
of services such as search capabilities and links. 974 A differentiation between the
tangible and intangible versions of the same goods would not be unfair. 975 In terms
of the transitional provisions applicable to the UK when it joined the EU, it is allowed
to retain the zero rating and exemption provisions that were in place in 1991, but it
may not extend the zero rating and exemption provisions. 976 Expanding the scope of
zero rating on books to e-books would be in contravention of Council Directive
2006/112/EC. During October 2012 the EU ordered France and Luxembourg to
abandon their reduced rates on e-books. 977 Should countries like France,
Luxembourg, and the UK continue with reduced or zero rating of e-books, many ebook suppliers could establish their businesses in these countries to benefit from
lower VAT rates until 31 December 2014 when the benefits of low VAT regimes will
effectively be removed. This could cause serious market distortions and economic
recession in other Member States. The damage caused by the current regime can
take many years to normalise after the implementation of the amendments of 1
January 2015. The European Commission suggests that in cases of differentiated
VAT rates between tangible goods and their intangible counterpart, a uniform VAT
973
Sinyor A as quoted in Fuller C (2012) UK: VAT Charges on E-books Could be Dropped Accountancy Age
http://www.accountancyage.com/aa/news/2220471/vat-charges-on-ebooks-could-be-dropped [accessed on 2
November 2012].
974
Notes International vol 54 no 1 at 63; Garca AMD and Cuello RO (2011) Electronic Commerce and Indirect
Taxation in Spain European Taxation vol 51 no 4 at 145.
975
976
Fuller C (2012) UK: VAT Charges on E-books Could be Dropped Accountancy Age
November 2012].
977
November 2012]; Stewart DD (2012) EU takes on VAT treatment of E-Book sales Tax Notes International vol
67 no 3 at 199.
204
rate should be adopted. 978 This can be achieved by either maintaining the standard
rate, or adopting the reduced rate for tangible and intangible goods. 979 This should,
however, be done with caution and all externalities must be considered to avoid
market distortions.
The revenue potential of any VAT system depends on three factors: the rules
describing rates, bases, thresholds and structural features of the tax; the scale of
taxable activities; and the degree to which the rules are complied with. 980
All three
factors are of equal importance and should be developed to co-exist and

complement each other. In other words, well established VAT rules that can be
applied to a broad base of activities are nullified if the collection mechanisms in place
are inadequate to collect the taxes that are supposed to be levied on the activities.
Many countries that have a VAT system rely on voluntary compliance in terms of the
self-assessment mechanism to collect VAT charged on taxable supplies. 981 Council
Directive 2006/112/EC, in principle, provides for a self-assessment regime in
Member States. 982 An effective self-assessment system is, inter alia, characterised
by simple VAT registration, filing, payment, and refund procedures. 983 Council
Directive 2006/112/EC provides for different registration, filing, payment, and refund
procedures for the different types and classes of taxpayer. For the purposes of this
study, I shall limit the discussion to these procedures applicable to the classes of
taxpayer identified in paragraph 4.3.5 above.
978
979
980
981
982
Articles 193-205 of Council Directive 2006/112/EC.
983
205
4.3.8.1 Collection mechanism: EU supplier

4.3.8.1.1 Position until 31 December 2014
Generally, any taxable person who carries out any economic activity independently
in any place - whatever the purpose or result of the economic activity - is required to
register for VAT. 984 In other words, any supplier of electronically supplied services
who is established in the EU and who renders the supplies at any place (inside or
outside of the EU) is, as a general rule, obliged to register for VAT. That said,
Council Directive 2006/112/EC has retained the special VAT threshold provisions
applicable to the 9 Member States that formed the European Union when the Sixth
VAT Directive was in place. 985, Specific rules further apply to the 18 countries that
acceded to the EU after 1 January 1978. 986, The thresholds provided for in articles
286 and 287, set the maximum threshold that the individual Member States may
apply. Each Member State is allowed to determine its own threshold up to the ceiling
threshold stipulated. It should be noted, that despite the fact that a vendor might be
exempted from registering for VAT as a result of the VAT threshold applicable in the
Member State of establishment, it could be required to register for VAT under the
Member States small business scheme registration. 987 For example, in Austria,
984
Article 9(1) read with Title XI of Council Directive 2006/112/EC.

Annacondia F and van der Corput W (2009) VAT Registration Thresholds in Europe International VAT
Monitor vol 20 no 6 at 488 http://www.adko.hu/01_files/informaciok/thresholds2009-oktober.pdf [accessed
on 31 October 2012]; Annacondia F and van der Corput W (2012) VAT Registration Thresholds in Europe
International VAT Monitor vol 23 no 6 at 422. In terms of article 286 the current threshold for Belgium (5580),
UK (76 100), Denmark (6 700), France (32 000 in respect of services), Germany (17 500), Ireland (37 500 in
respect of services), Italy (30 000), Luxembourg (10 000), and the Netherlands (1 345) is 5000 Euros.
986
International VAT Monitor vol 23 no 6 at 422. In terms of article 287 the thresholds are as follows (the actual
thresholds are in brackets): Greece (10 000 in respect of goods; 5 000 in respect of services), Spain (-), Portugal
(12 500 for small businesses), Finland (8 500), Sweden (3450) and Poland (36 200): 10 000 Euros; Austria
(30 000), Czech Republic (40 160), Hungary (17 875) and Slovakia (49 790): 35 000 Euros; Estonia (16 000):
16 000 Euros; Cyprus (15 600): 15 600 Euros; Latvia (50 300): 17 200 Euros; Lithuania (44 900): 29 000 Euros;
Slovenia (25 000): 25 000 Euros and Malta: 37 000 Euros (35 000) if the economic activity consists mainly of
the supply of goods, 24 300 Euros (24 000) if the economic activity consists mainly of the supply of services
with a low value added (high inputs), and 14 600 Euros (14 000) in other cases of the supply of services with a
high value added (low inputs).
987
Monitor vol 20 no 6 488 http://www.adko.hu/01_files/informaciok/thresholds2009-oktober.pdf [accessed on
985
206
France, and Greece, small businesses with a turnover exceeding Euros 7 500 must
still register for VAT despite the general VAT threshold set in Council Directive
2006/112/EC. 988 In Belgium, small businesses must register for VAT but are
exempted from filing tax returns if their turnover is less than Euros 5 580 per
annum. 989
A supplier who wishes to render digitally supplied services from a Member State to
customers situated in or outside of the Community, must register for VAT if the
supplies will exceed the threshold in the Member State in which it intends to be
established. 990 In Belgium, the supplier would be required to register irrespective of
its annual turnover.
Since Council Directive 2006/112/EC (valid until 31 December 2014) does not
specifically provide for place-of-supply rules in the case of electronically supplied
services by an EU supplier to a non-taxable person in the EU who resides in a
Member State other than the Member State in which the supplier is established, the
general place-of-supply rules in terms of article 43 apply. Article 43 provides that the
place of supply is deemed to be the place where the supplier is established, has his
permanent address, or usually resides. Therefore, once registered in the Member
State of establishment, the supplier shall account for VAT, at the rate applicable in
the Member State of establishment, on all digital supplies rendered within the EU. 991
The supplier is not required to register for VAT in every Member State in which it
renders digital supplies. VAT collection in these cases is fairly easy and
uncomplicated. No additional burden is placed on a supplier that makes intraCommunity supplies as intra-Community supplies are treated the same as domestic
31 October 2012]; Annacondia F and van der Corput W (2012) VAT Registration Thresholds in Europe
988
989
Boomsma A, Ermel A, Somers J, Tirard J (1989) Ernst & Young VAT in Europe at 25; Annacondia F and van
der Corput W (2009) VAT Registration Thresholds in Europe International VAT Monitor Nov/Dec 2009 at 489
fn 2 http://www.adko.hu/01_files/informaciok/thresholds2009-oktober.pdf [accessed on 31 October 2012];
990
991
Article 43 read with article 193 of Council Directive 2006/112/EC.
207
supplies. A supplier can expand its distribution territory without being subject to an
additional tax compliance burden.
4.3.8.1.2 Position after 1 January 2015
The amendments to the place-of-supply rules in case of electronically supplied

services that will take effect from 1 January 2015, will have a profound effect on how
EU suppliers will account for VAT on intra-community supplies. In addition, VAT
collection mechanisms will also alter to ensure the least burdensome compliance
dispensation. From 1 January 2015, the place of supply will shift from the suppliers
place of establishment to the place where the customer is established, has his fixed
address, or resides. 992 This entails that suppliers must account for VAT on their
supplies at the VAT rate applicable in the Member State in which the customer is
established. VAT compliance can be accomplished in two ways: The vendor can
register for VAT in each of the Member States in which it makes electronically
supplied services and submit VAT returns in accordance with each Member States
VAT rules; or the vendor can account for VAT in terms of the special scheme for
telecommunications, broadcasting or electronic services supplied by taxable persons
established within the Community but not in the Member State of consumption as
provided for in Council Directive 2008/8/EC.
i) Vendor registration in all Member States of consumption
Vendor registration in all Member States of consumption is not advised. In some

Member States registration other than in terms of a special scheme, requires that the
VAT vendor must have a physical presence in that country. For example, Germany
requires a physical presence at the location where the supplier intends to register,
while in Ireland the main place of business must be located in the area where the
992
208
supplier intends to register. 993 The supplier could, accordingly, be required to

establish
physical
presence
in
various
jurisdictions
which
would
be
counterproductive in e-commerce transactions characterised by their intangible

nature. In addition, supplies made in certain jurisdictions could be less than the
turnover threshold, preventing vendor registration. Business expansion is further
restricted due to the high cost of compliance and an increased administrative
burden.
ii) Special scheme for EU suppliers of intra-community electronically delivered

services
In terms of the special scheme for EU suppliers, the supplier would be required to
register as a vendor in one Member State only, and file tax returns only in that
Member State. 994 The VAT return shall reflect the VAT collected on behalf of
revenue authorities in all the Member States in which the supplies are consumed
(place where the customer resides) at the rate applicable in the respective Member
States. 995
a) Physical presence or fixed place of business required?
Compliance under the special scheme still requires that the supplier maintain a
physical presence (established business) in at least one Member State. 996
993
Boomsma A, Ermel A, Somers J, Tirard J (1989) Ernst & Young VAT in Europe at 75 and 106.
Article 369d of Council Directive 2008/8/EC; also see Parrilli DM (2009) Electronically Supplied Services and
Value Added Tax: The European Perspective Journal of Internet Banking and Commerce vol 14 no 2 at 14.
Lamensch M (2012) Are reverse-charging and the one-stop-scheme efficient ways to collect VAT on digital
supplies? World Journal of VAT/GST Law vol 1 issue 1 at 3; Schenk A and Oldman O (2007) Value Added Tax: A
Comparative Approach at 214.
995
Article 369g of Council Directive 2008/8/EC; Parrilli DM (2009) Electronically Supplied Services and Value
Added Tax: The European Perspective Journal of Internet Banking and Commerce vol 14 no 2 at 14;
supplies? World Journal of VAT/GST Law vol 1 issue 1 at 3.
996
Article 369a(1) of Council Directive 2008/8/EC.
994
209
Lamensch points out that a physical presence is not required. 997 Where the supplier
has establishments in multiple Member States, it can opt to register for the special
scheme in one Member State of its choice. 998 The supplier will be bound by its
choice in the calendar year concerned and for two calendar years following. 999 A
company supplying digital services is not reliant on the traditional infrastructure such as physical offices, warehouses, and points of sale - typically associated with
the supply of goods. Rather, it is reliant on technical standards and the availability of
network connections. It is, therefore, possible for a supplier to operate its business
on a portable computer, or from a small room in someones back yard or basement.
If the dicta in Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt, 1000 are
considered, an establishment must be of a certain minimum size and the human and
technical resources necessary to operate it must be permanently present. The court
failed to address the issue of what it regards as a minimum size. It is trite that a
server will occupy some physical space where it is located as servers are in fact
tangible equipment. 1001 However, the human and or technical resources necessary
for the server to operate, are not required to be permanently present for the server to
operate. The benefits of cloud-computing allow the server to be remotely operated or
pre-programmed to operate without human intervention.
For VAT purposes, a server would not constitute a fixed establishment, irrespective
of whether or not it is physically present or fixed at a location in a Member State. 1002
Skaar notes that portable devices can never constitute a place of business as they
are not fixed in one location. 1003 This would create a problem for suppliers who
render digital supplies from portable devices. Article 369a requires only that the
supplier be established in the Community and no actual fixed establishment is
required. In other words, can it be said that the supplier is established in the EU if its
997
998
Article 369a of Council Directive 2008/8/EC.
999
Article 369a of Council Directive 2008/8/EC.
1000
Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt C-168/84 (1985) ECR I-02251 at para 18.
1001
Parrilli DM (2008) Grid and Taxation: The Server as Permanent Establishment in International Grids in
Altman J, Neumann D and Fahringer T (eds) (2008) Grid Economics and Business Models: Lecture Notes in
Computer Science at 92.
1002
1003
Skaar AA (2000) Erosion of the Concept of Permanent Establishment: Electronic Commerce Intertax vol
28 no 5 at 189.
210
business exists virtually? It is trite that a virtual business would be effectively

managed from a fixed address, even in cases where the business is operated
through portable computers. The word established stems for the Latin stabilire
which means to make firm, to set up something, or to bring about something. 1004
Skaars opinion that a portable device can never constitute a place of business is not
convincing. The portable device in itself, just like a fixed server, cannot constitute a
business or place of business. However, the whole of the operation, including the
location of the equipment, should be considered to determine whether a business is
established in a particular jurisdiction. Rendahl suggests the criteria for permanent
establishment for income tax purposes, could equally apply to determine if a
business is established for VAT purposes. 1005 The ECJ has, however, been reluctant
to extend the permanent establishment criteria for income tax to VAT cases. 1006 It
can, however, be deduced from article 1 of the Eighth Directive 79/1072/EC, that
where an establishment cannot be located (because of its virtual or portable nature),
the domicile or normal place of residence of the business or that of its owners can be
applied to locate the place of establishment. 1007 The mere fact that the virtual
business has chosen a domicilium citandi et executandi in the EU, can justify the
conclusion that it is established in the EU for purposes of the special VAT scheme
for EU suppliers. Houtzager and Tinholt state that where a foreign supplier who
operates its business from a computer or server, the computer would qualify as a
fixed establishment if it is located in a building in the EU, and the supplier has
employed staff at that location in the EU irrespective of whether that staff operate the
computer. 1008
1004
nd
The Dictionary Unit for South African English (2010) Oxford South African Concise Dictionary 2 edition.
1006
Mistero dellEconomia e delle Finanze, Agenze delle Etrate v FCE BANK plc Case C-210/4 (2006) ECR I02803 at paras 6 and 41; Anthony R (2000) European VAT on E-commerce Services: Tax & VAT Planning of
Place of Supply Criteria Tax Planning International E-commerce vol 2 no 5 at 19.
1007
Mistero dellEconomia e delle Finanze, Agenze delle Etrate v FCE BANK plc Case C-210/4 (2006) ECR I02803 at para 6.
1008
Albarda ED, Derks RA, Dunaboo CA, Houtzager MLDP, Huibregtse SB, Krger D, Tinbolt JW, Vink MR (1998)
Caught in the Web: The Tax and Legal Implications of Electronic Commerce at 100-101.
1005
211
b) Thresholds in Member State of identification applicable?
The special scheme for EU suppliers does not provide for any thresholds. It is not
certain whether the thresholds applicable in the country of identification will still apply
in cases where the supplier intends to register under the special scheme. If this is
the case, suppliers established in Belgium would be required to register under the
scheme irrespective of their turnover, while suppliers established in the Czech
Republic would not be required to register if their turnover is less than Euros 37 800.
This could further mean that a supplier would not be required to register for VAT in
the country of establishment under national rules, but could be required to register
under the special scheme because supplies rendered in the country of consumption
exceed the threshold applicable in that country.
c) Duties in terms of the special scheme
The taxable person who is registered under the special scheme shall, by electronic
means, communicate to the Member State of identification, when it commences or
ceases the taxable activities under the special scheme, or when it no longer meets
the conditions of the special scheme. 1009 VAT returns must be submitted quarterly, in
electronic form, to the Revenue Authority in the Member State of identification
irrespective of whether telecommunication, broadcasting, or electronically supplied
services were rendered during that period. 1010 Where no such services were
rendered, the VAT return, reflecting zero outputs, must still be submitted. The VAT
return, bearing the VAT identification number of the supplier, must show the total
amount (exclusive of VAT) of telecommunication, broadcasting, and electronically
supplied services broken down per Member State of consumption. 1011 In addition, it
must show the VAT collected at the applicable rate of each Member State of
1009
Article 369c of Council Directive 2008/8/EC.

Article 369f of Council Directive 2008/8/EC
1011
Article 369g of Council Directive 2008/8/EC.
1010
212
consumption, as well as the total amount of VAT due for that period. 1012 Where the
supplier has fixed establishments in more than one Member State, the VAT return
must also indicate the total supplies, VAT, and total VAT due in respect of
telecommunication, broadcasting and electronically supplied services covered under
the special scheme, together with the VAT identification numbers of each of the fixed
establishments. 1013 This provision creates the potential for VAT fraud.
Example 4.5: ABC Ltd is located in Germany and has fixed
establishments in Luxembourg, Spain, and Belgium. Each of the fixed
establishments is registered for VAT in the respective Member States.
ABC Ltd (Germany) registers under the special scheme in Germany.
In its VAT return under the special scheme, ABC Ltd must show the total
electronically supplied services rendered by its head office as well as by the fixed
establishments. The fixed establishments must, in their VAT returns in the country of
establishment, also show the total supplies (including electronically supplied
services). Each fixed establishment must, in its VAT return, deduct the amount of the
output that constitutes supplies in terms of the special scheme. 1014 It is not certain
whether the taxpayer must submit proof to the local revenue authority that the
supplies were aptly taxed in terms of the special scheme. Suppliers could effectively
submit a zero output VAT return in terms of the special scheme and submit a tax
deduction for the actual supplies in the country of establishment. On the other hand,
in the absence of proper co-operation between tax authorities, the supplier could be
double taxed on the same supplies should the local revenue authorities deny the
deduction allowed in terms of article 369j. The onus rests on the taxable person to
prove that the supplies were taxed in terms of the special scheme. This could be a
costly administrative task.
The VAT return must be made out in Euros. 1015 Where the country of consumption
has not adopted the Euro, the supplier must still account for VAT in Euros in terms of
1012

1014
Article 369j of Council Directive 2008/8/EC.
1015
Article 369h of Council Directive 2008/8/EC.
1013
213
the exchange rate applicable on the last date of the tax period 1016 as published by
the European Central Bank. 1017 This could result in different exchange rates reflected
in the VAT return and the actual VAT collected when the supply was made.
Payment of VAT can be made in Euros to the bank account as designated by the
Member State of identification. 1018 Member States which have not adopted the Euro
may require payment in the Member States currency. 1019
In contrast to the strict record keeping duty in terms of the South African Tax
Administration Act, 1020 suppliers under the special scheme should keep electronic
records accessible to revenue authorities, at any location in the world, for a period of
ten years after 31 December of the year in which the VAT returns are submitted.1021
Electronic records must be stored in a manner that will enable the Member State of
consumption to determine if the VAT return is correct. 1022
Many authors have questioned the desirability of a one-stop-shop as a VAT
collection mechanism in cross-border trade. While it is trite that the implementation
of a one-stop-shop is less cumbersome for suppliers than VAT registration in each
jurisdiction where it makes taxable supplies, the administrative burden of identifying
and locating the customer in order to apply the correct VAT rate (and submit
accurate VAT returns), as I have pointed out before, is an almost impossible task to
perform accurately. The amendments of 1 January 2015 do not give guidance on the
degree of accuracy that is required in locating the customer. Suppliers could be
liable for hefty tax penalties and interest in the Member State of identification, and in
each Member State of consumption (or Member State that claims to be the
jurisdiction of consumption), for filing inaccurate VAT returns. 1023
1016
Article 369h(1) of Council Directive 2008/8/EC.

Article 369h(2) of Council Directive 2008/8/EC.
1018
Article 369i of Council Directive 2008/8/EC.
1019
Article 369i of Council Directive 2008/8/EC.
1020
Act 28 of 2011. Also see paragraph 3.4.7.1.4 above.
1021
Article 369k(2) of Council Directive 2008/8/EC.
1022
Article 369k(1) of Council Directive 2008/8/EC.
1023
1017
214
On the other hand, the one-stop-shop ensures better compliance, thus protecting the
tax base from erosion. Taxpayers, under the special scheme, are known to revenue
authorities and audits can be performed on a regular basis.
The success of a one-stop-shop relies on the co-operation of revenue authorities in
all the Member States. This not only requires revenue authorities to assist each other
in the administration of cross-border VAT collection, but they must be ad idem on the
interpretation of the harmonised EU VAT legislation.
Creating a VAT collection mechanism that is fair, enforceable, and equitable to both
suppliers and revenue authorities, is a difficult task and is perhaps still a far way off.
Parrilli correctly points out that the amendments of 1 January 2015 are definitely not
perfect, but they can be a useful starting point for further discussion and analysis in
reaching the final harbour. 1024
4.3.8.2 Collection mechanism: EU supplier in terms of the reverse-charge

mechanism
In the case of digital cross-border supplies between EU suppliers and digital imports
by EU suppliers, VAT compliance is ensured by the reverse-charge mechanism. This
means the VAT vendor must account for VAT on all digital imports and intraCommunity supplies in the Member State in which it is established. VAT collection is
fairly uncomplicated for both the taxpayer and the revenue authority. In contrast to
the South African reverse-charge mechanism, the EU supplier must account for VAT
on imported electronically supplied services irrespective of whether or not the
services are to be utilised in the making of taxable supplies. Where the imports or
intra-community supplies are utilised in the making of taxable supplies, the taxpayer
would be entitled to an input VAT deduction. In further contrast to the South African
position, these provisions create better tax certainty and do not rely on the
interpretation of the taxpayer of what constitutes utilisation in the making of taxable
supplies, and what constitutes final consumption. Since the taxpayer is known to the
1024
215
revenue authority, and has to reflect all imports on VAT returns, audits can be done
more frequently and with greater ease, ensuring better compliance.
4.3.8.3 Collection mechanism: Foreign supplier
A high probability exists that non-EU suppliers will have no exposure to the
European VAT compliance obligations, even where their activities fall within the
definition of electronically supplied services. 1025 This is mainly due to the fact that
B2B transactions account for the majority of cross-border e-commerce transactions,
and compliance is shifted to the EU vendor in terms of the reverse-charge
mechanism. 1026
Non-EU suppliers who renders electronically supplied services to EU customers who
are not taxable persons (final consumers), have three options to ensure EU VAT
compliance - establish in an EU Member State as an EU supplier; register in each
Member State where there are taxable activities without creating an establishment;
register under the special scheme for non-established suppliers.
4.3.8.3.1 Establish in a Member State
Until 31 December 2014 this may be the most attractive option for most foreign
suppliers as it would mean operating on the same basis and on par with an EUestablished company. 1027 The supplier can choose to register in the Member State
with the lowest VAT rate (currently Luxembourg), which will place it at an advantage
over other suppliers subject to higher VAT rates. Registration as an EU-supplier
does, however, require that the supplier to have established a fixed business in the
1025
1026
1027
Law Review 38 no 1 at 78; Hobbs C and Christie K (2011) Cloud Computing and VAT Tax Notes International
vol 62 no 11 at 899.
216
Member State of registration from where supplies will be rendered. 1028 In other
words, a physical presence is required. This could be costly and counterproductive in
e-business characterised by the fact that a physical presence is not always required
for it to operate. In addition, the benefits of establishing in a low VAT jurisdiction will
be short-lived only until the January 2015 amendments take effect. Minor,
however, points out that it is possible to be liable for VAT in the Member State of
establishment and in another Member State where the services are supplied, if the
jurisdiction of consumption (supply) is deemed to be the jurisdiction where the
supplier has a fixed establishment under that Member States fixed establishment
deeming provisions. 1029 This could lead to a risk of double taxation that could, in
most cases, only be resolved by litigation in the ECJ. 1030 Given the strict
interpretation of fixed establishment it is unlikely that double taxation can be
eliminated. 1031
4.3.8.3.2 Registration in all Member States of economic activity without creating an

establishment.
In certain commercial and professional occupations (for example an architect who

draws up plans for an EU city, or a singer undertaking a European tour) it has long
been practice in the EU to require such suppliers to account for VAT in the Member
State of economic activity through the appointment of a representative taxpayer. 1032
The current place-of-supply rules applicable to electronically supplied services
widened the range of taxable persons affected by this provision. 1033 Suppliers of
electronically supplied services could effectively be required to register in up to 27
1028
Minor R (2011) A Primer on the One-Stop Shop VAT Compliance Scheme for non-EU Suppliers of Ecommerce Services Tax Notes International vol 62 no 13 at 1046.
1030
1031
1032
Article 204(1) of Council Directive 2006/112/EC; Also see Bill S and Kerrigan A (2003) Practical Application
of European Value Added Tax to E-commerce Georgia Law Review 38 no 1 at 79.
1033
1029
217
Member States, and appoint a representative taxpayer in each of these. These

different sets of registration, each holding its own obligations, would be a
cumbersome administrative burden to overcome and is not advised. Minor opines
that non-EU suppliers who fail to register under the one-stop-shop scheme are likely
to be required to register in each Member State in which they have customers. 1034
4.3.8.3.3 Special scheme for non-established suppliers
In terms of the special scheme for non-EU suppliers who make electronically
supplied services available to EU customers, the supplier can choose to register
under the scheme in the Member State of identification and account for VAT in that
Member State. VAT should, however, be levied at the rate applicable in the Member
State of consumption. 1035
The supplier vendor must be a foreign vendor who does not have a fixed
establishment or is not otherwise required to be established in the EU. 1036 No
physical presence in the EU is required. Any supplier who makes electronically
supplied services available to EU consumers (who are not taxable persons) qualifies
as a taxable person for purposes of the special scheme. The supplier can choose
the Member State of identification in which it wishes to register under the scheme,
and to which it will submit its VAT returns. 1037 In the UK, registration can be
completed online. 1038
1034
1035
Articles 358-369 of Council Directive 2006/112/EC which applies until 31 December 2014. From 1 January
2015 the special scheme shall also apply to suppliers of broadcasting and telecommunication services.
1036
Article 358(1) of Council Directive 2006/112/EC; article 358a(1) of Council Directive 2008/8/EC.
1037
Article 358(3) of Council Directive 2006/112/EC; article 358a(2) of Council Directive 2008/8/EC.
1038
Cass M and Mason C (2003) Recent Changes to EU VAT for Services Supplied Electronically World
Internet Law Report vol 4 issue 11 at 14.
218
a) Duties in terms of the special scheme
The non-established taxpayer shall, by electronic means, notify the Member State of
identification when it commences or ceases with its activities as taxable person, or
when it changes its activities and no longer meets the requirements of the special
scheme. 1039 The non-established taxpayer must, when it commences a taxable
activity in the Community, supply the Member State of identification with its name,
postal address, electronic address (including websites), national tax number in the
country of establishment, and a statement that the taxpayer is not identified to be
registered for VAT purposes in the EU other than in terms of the special scheme. 1040
The supplier must submit a VAT return to the Member State of identification quarterly
and by electronic means, irrespective of whether or not electronically supplied
services (and after 1 January 2015: telecommunication or broadcasting services)
were rendered during the applicable tax period. 1041 This is a special accounting
return method designed as an abridged VAT return compared to VAT returns
submitted by businesses established in the EU. 1042 The VAT return must be
submitted within 20 days following the last day of the tax period covered by the
return. 1043 Tax periods are divided quarterly. 1044 The VAT return shall state the total
value (exclusive of VAT) of the electronically supplied services (after 1 January 2015
the total value of telecommunication and broadcasting services must also be
included), as well as the corresponding VAT at the rate applicable in the country of
consumption, and the total VAT due for the tax period. 1045 Lamensch points out that
this is quite difficult to administer. 1046 The VAT return shall be made out in Euros and
payment of the VAT (in Euros) shall be made into a designated bank account
1039
Article 360 of Council Directive 2006/112/EC; article 360 of Council Directive 2008/8/EC.
Article 361 (1) of Council Directive 2006/112/EC; article 361(1) of Council Directive 2008/8/EC.
1041
1042
1043
1044
1045
1046
1040
219
identified by the Member State of identification. 1047 Member States who have not
adopted the Euro, may require that the VAT return be made out in the national
currency at the exchange rate applicable on the last day of the tax period 1048 as
published by the European Central Bank. 1049 The revenue authority in the Member
State of identification is required to remit taxes collected under the scheme quarterly
within a short time frame. 1050
The taxpayer (supplier) must keep electronic records of the transactions covered by
the special scheme for a period of 10 years from the last day of the year during
which the transaction was performed. 1051 The records must be sufficiently detailed to
enable the tax authorities in the Member State of consumption to verify whether the
VAT return is correct. 1052 The absence of guidelines on how suppliers must store
information, in what format, and for how long the information must be retained, result
in legal uncertainty. 1053Baron opines that the administrative burden of record keeping
cancels out the simplicity envisaged and brought about by the special scheme. 1054
Since the non-established taxpayer would not be conducting a full scale enterprise in
the EU, it would not be entitled to make any input VAT deduction in respect of the
supplies it makes in terms of the special scheme. 1055 Should the taxpayer be of the
opinion that it is entitled to a deduction for input VAT, it can apply for a refund of the
input VAT paid in accordance with the Thirteenth Directive refund procedure. 1056 This
means that the taxpayer must apply for a VAT refund in each of the Member States
1047
Articles 366 (1) and 367 Of Council Directive 2006/112/EC; articles 366 (1) and 367 of Council Directive
2008/8/EC.
1048
Article 366(1) of Council Directive 2006/112/EC; article 366(1) of Council Directive 2008/8/EC.
1049
1050
1051
Article 369 of Council Directive 2006/112/EC; article 369(1) of Council Directive 2008/8/EC.
1052
Article 369(1) of Council Directive 2006/112/EC; article 369(1) of Council Directive 2008/8/EC.
1053
Lamensch M (2012) Unsuitable EU VAT Place of Supply Rules for Electronic Services-Proposal
for an Alternative Approach World Tax Journal vol 4 issue 1 at 85; Lejeune I, Cortvriend E, Accorsi D
(2011) Implementing Measures Relating to EU Place-of-Supply Rules: Are Business Issues Solved
and is Certainty Provided? International VAT Monitor vol 22 no 3 at 147.
1054
Baron R (2002) VAT on Electronic Services: The European Solution Tax Planning International Ecommerce vol 4 no 6 at 5.
1055
Article 368 of Council Directive 2006/112/EC; article 368 of Council Directive 2008/8/EC; Lamensch M
(2012) Are reverse-charging and the one-stop-scheme efficient ways to collect VAT on digital supplies?
World Journal of VAT/GST Law vol 1 issue 1 at 7.
1056
220
in which input VAT was incurred. 1057 Bill and Kerrigan correctly point out that the
supplier who merely supplies electronically supplied services to EU consumers,
would be unlikely to incur any expenses in the EU in the making of the supplies. 1058
The rules are silent on this, but it is presumed that any input deduction to which the
supplier would be entitled, would be made in the tax return in the Member State of
identification. 1059 This could be a lengthy process, depending on the procedure and
practice of the country from which the refund is being sought. 1060 That said, any
refund within the EU would be rare. 1061
b) Criticism
Ever since the special scheme was proposed, it has been subjected to severe
criticism by non-European suppliers of electronically supplied goods, politicians, and
economists. Basu points out that enforceability of the special scheme is the Achilles
heel of the European VAT system. 1062 The enforceability of the special scheme
causes problems owing to the difficulties in identifying the customers VAT status
and location, which lead to additional administrative costs. 1063 In addition, it is
unclear if and how the EU can force a supplier from a non-EU country to register for
VAT under the special scheme in a Member State. 1064 This is in particular a concern
1057
1058
1059
Minor R (2011) A Primer on the One-Stop Shop VAT Compliance Scheme for non-EU Suppliers of Ecommerce Services Tax Notes International vol 62 no 13 at 1045
1060
Minor R (2011) A Primer on the One-Stop Shop VAT Compliance Scheme for non-EU Suppliers of Ecommerce Services Tax Notes International vol 62 no 13 at 1045; Cervino G (2007) VAT and E-commerce
International Tax law Review vol 3 at 140-141; Fetzer T (2002) Non-EU Businesses to Collect VAT on Electronic
Services Tax Planning International E-commerce vol 4 no 7 at 9; De la Feria R (2006) The EU VAT System and
the Internal Market at 110.
1061
Law Review 38 no 1 at 80; Terra BJM and Kajus J (2012) A Guide to the European VAT Directives vol 1 at 1037.
1062
1063
Cervino G (2007) VAT and E-commerce International Tax law Review vol 3 at 140; Lamensch M (2012)
Are reverse-charging and the one-stop-scheme efficient ways to collect VAT on digital supplies? World
Journal of VAT/GST Law vol 1 issue 1 at 5-7.
1064
221
in the case of suppliers who are established in the USA. In Quill Corp v North
Dakota, 1065 Justice Stevens ruled in the Supreme Court of the USA, that states
cannot require suppliers who make interstate supplies to collect sales tax on their
supplies to consumers in the state of consumption if the supplier does not have a
physical presence in that state. The mere fact that a supplier communicates with a
customer in a state via mail does not create a sufficient nexus between the supplier
and the state to force the supplier to collect sales tax on its supplies on behalf of the
state of consumption. 1066 It could be argued that the scope of this decision is not
limited to inter-state sales in the USA, but that it also applies to international sales.
The result is that EU Member States cannot, by virtue of the fact that a USA supplier
makes electronically supplied services available to customers in the EU, compel the
supplier to collect VAT on its behalf in the absence of a physical presence in the EU
Member State. In addition, the Internet Tax Freedom Act of 1998 - which has been
extended to apply until 1 November 2014 - protects consumers and suppliers against
the imposition of new taxes on e-commerce, including the imposition of taxes on outof-state businesses. 1067 As a result, many USA-based suppliers are unaware of their
duty under EU VAT rules to collect VAT on supplies made to their customers who
resides in the EU. 1068 Merrill points out that, should the EU rules be enforceable on
USA businesses, the nexus argument would fall away and EU suppliers who make
digital supplies to USA customers could be required to collect state taxes on behalf
of USA states in the various tax jurisdictions. 1069 This could result in EU suppliers
accounting for sales tax in up to 7 000 different USA tax jurisdictions. 1070 In the
absence of international agreements, it is doubtful under public international law
whether the EU has the extra-territorial authority to impose such a duty on foreign
1065
Quill Corp v North Dakota (91-0194), 504 U.S. 298 (1992).

Quill Corp v North Dakota (91-0194), 504 U.S. 298 (1992); National Bellas Hess v. Department of Revenue 386 U.S. 753 (1967); America Online, Inc v Johnson Chancery Court of Davidson County Tennessee No 97-3786III (2001)
1067
Gordon-Murnane L (2000) E-commerce and Internet Taxation: Issues, Organizations and Findings
Searcher vol 8 issue 6 http://www.infotoday.com/searcher/jun00/gordon-murnane.htm [accessed on 15
January 2013]; Schafer CJ (2001) Federal Legislation Regarding Taxation of Internet Sales Transactions
Berkeley Technology Law Journal vol 16 at 416-417; Reddick CG and Coggburn JD (2007) E-commerce and the
Future of the State Sales Tax System: Critical Issues and Policy Recommendations International Journal of
Public Administration vol 30 at 1027-1028; Schenk A and Oldman O (2007) Value Added Tax: A Comparative
Approach at 219.
1068
1069
Merrill PR (2001) The Moving Target of E-commerce The CPA Journal November 2001 at 38.
1070
Merrill PR (2001) The Moving Target of E-commerce The CPA Journal November 2001 at 38.
1066
222
suppliers who do not have a fixed establishment in or sufficient nexus to the EU. 1071
However, Doernberg and Hinnekens opine that, in the case of consumption taxes, a
vendor should not be required to have a fixed establishment in the state or country
where it makes digital supplies for it to be liable for VAT in that state or country. 1072
How will the EU enforce VAT compliance on businesses that exist in cyberspace?
Where will the EU enforce compliance? If the vendor exists in cyberspace only, its
mobility allows it to be established in various low-tax jurisdictions or tax havens that
have no tax treaties with the EU. 1073 Minor notes that unilateral and multilateral interjurisdictional audits on non-compliant businesses, are on the rise irrespective of the
presence or absence of international tax treaties. 1074 In a Green Paper released for
consultation in December 2010, the European Commission suggests that:
i) Tax authorities must be encouraged to cooperate on VAT at International
level; and
ii) New ways of collecting VAT from consumers should be investigated, for
example, checking online payments. 1075
The current system is heavily reliant on voluntary compliance. 1076 From a neutrality
and competition perspective, it is questionable whether a system based on voluntary
1071
Wasch K as quoted in Basu S (2002) European VAT on Digital Sales Journal of Information, Law and
Technology issue 3 http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October 2012]; Ivanson J
(2003) Why the EU VAT and E-commerce Directive Does not Work International Tax Review vol 14 issue 9 at
31. In Trans Tirreno Express SpA v Ufficio provinciale IVA Case C-283/84 (1986) ECR I-00231, the court ruled
that a Member State is not precluded from applying its VAT legislation in respect of transport between two
points in its national territory even where part of the journey is completed outside its territory, provided that
this does not encroach on the tax jurisdiction of other states.
1072
1073
Scott C, Derrick F, Sedgley N (2003) Consumption Taxes in the Internet World International Advances in
Economic Research vol 9 no 4 at 310.
1074
1075
1076
Efficient VAT System COM(2010) 695 final at 12 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0695:FIN:EN:PDF [accessed on 21 January 2013];
Fetzer T (2003) Digital Sales and the European Union: Taxing Times Imminent Tax Planning International Ecommerce vol 5 no 4 at 7; Lambourne M and Llewellyn J (2002) Does EU VAT Extension Catch You? Tax
Planning International E-commerce vol 4 no 11 at 5; Lejeune I, Korf R, Grnauer A (2003) New E-commerce
Directives: A Move Towards e-Europe? Journal of International Taxation vol 14 no 4 at 22-23.
223
compliance will be acceptable in the long term. 1077 That said, the suggestions by the
European Commission to address this issue are vague and based on a selfassessment mechanism which relies on voluntary compliance. 1078 In the UK failure
to register may result in compulsory registration and a late registration penalty of
between 5 and 15 percent of the VAT due. 1079 How this will be enforced against
foreign suppliers remains an open question.
As the supplier cannot locate the customers residence or place of consumption with
absolute accuracy, the value of registering under the scheme is doubtful. 1080 The
Directive is based on the premise that there will be technology that is able to locate
the customers residence. Should this technology fail to materialise, the directive will
be unenforceable. 1081 In addition, the anonymity of e-commerce and the lack of a
paper trail could mean that most of these transactions will be unknown in the EU.
The Netherlands, the UK, Gemany, France, and Denmark have introduced software
programs to perform systematic searches on the Internet for persons or companies
offering products via the Internet. 1082 However, it is doubtful whether a Member State
has extra-territorial jurisdiction to subject that supplier to an EU VAT audit in the
country where the supplier is established. The Directive does not provide detail on
how Member States will trace non-compliant businesses or enforce compliance. 1083
Hardesty notes that Member States would rely on tip-offs from compliant suppliers
who are in competition with non-compliant suppliers. 1084 While this partially resolves
1077
1078
1079
1080
Commissions Approach Intereconomics July/August at 159; Lamensch M (2012) Are reverse-charging and
the one-stop-scheme efficient ways to collect VAT on digital supplies? World Journal of VAT/GST Law vol 1
issue 1 at 8.
1081
1082
European Union Focus vol 7 no 10 at 15.
1083
1084
Hardesty D (2000) EU Continues Efforts to Tax Digital Products E-commerce Tax News 22 October 2000
224
the issue of detecting non-compliance, it still does not resolve the issue of how the
Member State would enforce compliance or payment in the suppliers jurisdiction of
establishment. Furthermore, Hardestys opinion is based on the assumption that
compliant businesses will report non-compliant businesses. It is possible that
compliant businesses can follow in the footsteps of non-compliant businesses to
compete on par. Bill and Kerrigan, in an unsubstantiated statement, are of the
opinion that businesses will want to be compliant. 1085 Jenkins believes that because
of the legal certainty created by clear and unambiguous Directives, suppliers willing
to expand are more likely to comply. 1086 However, given the fact that non-compliance
cannot be traced or adequately penalised, I (perhaps cynically) fail to see any reason
why businesses would be compliant. Van der Merwe points out that the only
remedies available to the EU are to: a) block access to websites of non-compliant
businesses; b) refuse to protect the intellectual property of non-compliant
businesses; c) publish the names of non-compliant companies; or d) to arrest the
management of non-compliant businesses when they travel through Europe. 1087 The
legitimacy of these remedies is however questionable if it is considered that their
basis lies in an unenforceable inter-jurisdictional obligation.
The EU Commission argues that non-EU companies would have an interest in
collecting VAT on behalf of Member States because the Member States already
protect their intellectual property within the Community. 1088 The European
Commission is further of the opinion that no business trading in the worlds largest
market, would wish to have tax debt building up against it. 1089 Basu correctly points
out that a give-and-take relationship is neither legislation that can be enforced, nor is
1085
Law Review vol 38 no 1 at 81
1086
Jenkins P (2000) The EU Proposals for the Effective Application of VAT in the Internet Age Tax Planning
International E-commerce vol 2 no 12 at 7.
1087
Consumers SA Merc LJ vol 16 no 4 at 588; Fitzgerald S (2002) U.S. Companies Sales to EU Consumers Subject
to VAT on Digital Downloads The Tax Adviser June at 383-384.
1088
http://elj.warwick.ac.uk/jilt/02-3/basu.html [accessed on 5 October 2012]; Fetzer T (2003) Digital Sales and
the European Union: Taxing Times Imminent Tax Planning International E-commerce vol 5 no 4 at 7; Baron R
(2001) VAT- Where Next for Europe? Tax Planning International E-commerce vol 3 no 1 at 12; Ivanson J
(2003) "Overstepping the Boundary-How the EU got it Wrong on E-commerce" International Tax Report
October at 11.
1089
Baron R (2001) VAT- Where Next for Europe? Tax Planning International E-commerce vol 3 no 1 at 12.
225
it an agreement enforceable in law. 1090 Since intellectual property rights are

protected based on international agreements, it is not open to the EU to violate them
in reaction to tax non-compliance. 1091 In essence, similar to the reverse-charge
mechanism that applies to consumers under South African law, the special scheme
relies on the honesty and integrity of taxpayers. Interestingly, in June 2004, just one
year after the special scheme was introduced, 845 non-EU companies were
registered under the special scheme, of these, eight were South African. 1092 VAT
collected from these companies amounted to Euros 90 315 000 by the end of June
2004. 1093 These figures are relatively low and could be indicative of the EUs inability
to enforce its VAT rules.
Compliance under the special scheme is not necessarily less burdensome or less
complicated than that established in each Member State of consumption. 1094 Not
only must the supplier comply with the requirements in the Member State of
identification, it also must comply with any existing relevant rules applicable in the
Member State of consumption. 1095 In other words, the supplier must study the
national VAT rules of all the Member States of consumption. Van der Merwe points
out that non-EU sellers should be allowed to follow a single set of rules for all EU
sales. 1096
In its initial proposal form, the special scheme provided for a registration threshold of
Euros 100 000. 1097 Neither the present form of the scheme, nor the January 2015
1090
1091
Baron R (2001) VAT- Where Next for Europe? Tax Planning International E-commerce vol 3 no 1 at 12;
Ivanson J (2003) "Overstepping the Boundary-How the EU got it Wrong on E-commerce" International Tax
Report October at 11.
1092
1093
1094
1095
Consumers SA Merc LJ vol 16 no 4 at 584; Garca AMD and Cuello RO (2011) Electronic Commerce and
Indirect Taxation in Spain European Taxation vol 51 no 4 at 142.
1096
1097
Consumers SA Merc LJ vol 16 no 4 at 585; Fitzgerald S (2002) U.S. Companies Sales to EU Consumers Subject
to VAT on Digital Downloads The Tax Adviser June at 382.
226
amendments, specifies a threshold. In the absence of a threshold, even small

businesses that occasionally make digital supplies to EU customers, must register in
terms of the special scheme. 1098 Fitzgerald correctly points out that it is not certain
whether vendors under the special scheme are subject to the individual Member
State thresholds, and if they are, whether the threshold in the Member State of
identification or that of consumption should apply. 1099 Some observers are of the
opinion that the proposed threshold was omitted intentionally and that it is not merely
an oversight. 1100 If this view is correct, the compliance burden could either deter
suppliers from rendering supplies to EU consumers, or persuade them not to comply
with the special scheme. 1101 That said, a threshold would disadvantage small EU
suppliers who compete against their non-EU competitors. Hardesty opines that both
EU and non-EU small businesses should be exempt. 1102 However, exemption as a
blanket rule is bad policy.
The time of completion of registration differs between Member States, ranging from
instant online registration, to an extended process that can take weeks. 1103 In the
Netherlands a registration form must be requested, completed and mailed to the
Belastingdienst. 1104 In Germany, registration can be completed online. 1105 In
Hungary, registration forms must be completed in Hungarian, and registration is
subject to the appointment of a fiscal representative. 1106 Non-EU suppliers are
1098
1099
Fitzgerald S (2002) U.S. Companies Sales to EU Consumers Subject to VAT on Digital Downloads The Tax
1100
European Union Focus vol 7 no 10 at 13; Van der Merwe B (2004) VAT in the European Union and
Electronically Supplied Services to Final Consumers SA Merc LJ vol 16 no 4 at 585.
1101
1102
Hardesty D (2000) EU Continues Efforts to Tax Digital Products E-commerce Tax News 22 October 2000
1103
1104
Belastingdienst (2013) Your Tax Office and Registration
http://www.belastingdienst.nl/wps/wcm/connect/bldcontenten/belastingdienst/business/vat/vat_in_the_net
herlands/vat_administration/your_tax_office_and_registration [accessed on 30 April 2013].
1105
Bundeszentralampt fr Steuern (2013) VAT on eServices https://evat.bff-online.de/001/addNetpForm
1106
KPMG (2013) Hungary: VAT Essentials
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/vat-gstessentials/pages/hungary.aspx#2 [accessed on 30 April 2013].
227
unlikely to register under the special scheme where registration cannot be completed
hassle-free and within a reasonably short time. 1107
4.4 Conclusion
The supply of digital goods is but one part in the larger phenomenon of e-commerce.
The changes in technology and the impact of globalisation in general (through the
economic significance of cross-border trade in intangibles) have had a major impact
on international trade and could result in digital trade taking the lions share of
international commerce. 1108 Lacunae in existing legislation, or inadequate legislation,
coupled with the rapid growth in global e-commerce could place an enormous strain
on a VAT system. This could even result in an erosion of the tax base. The Member
States, through the unified collaboration in the EU, are the first countries in the world
to modernise the harmonised VAT system in response to this global phenomenon.
The modernisation of the harmonised VAT rules, and in particular the provision for
electronically supplied services, is far from perfect. However, the developments in
the EU should be seen as a starting point in the right direction, and could further be
used as a learning tool in the development of a unified global solution.
Despite the many problems that modernisation has brought, it is clear from the
discussion above that many of the uncertainties currently faced under the South
African VAT Act, 1109 can be resolved by adopting the clear and certain provisions of
the EU VAT rules. These include the characterisation of digital goods as services;
the adoption of clear place, time, and value of supply rules; and the adoption of a
simplified vendor registration process for vendors who are not established in the
jurisdiction of consumption.
The problems that the modernisation of the EU VAT rules has brought may, in the
main, be attributed to
rapidly evolving technology outgrowing legislation,
1107
European Union Focus vol 7 no10 at 16.
1108
Law Review vol 38 no 1 at 83.
1109
Act 89 of 1991.
228
uncertainties resulting from imperfect legislation that is drafted in general terms, and
the lack of international cooperation.
In the first instance, the definition of electronically supplied services and the list of
what constitutes electronically supplied services, are rapidly outdated. The ECJ is
known for its strict interpretation of directives which could result in new technological
advances being excluded from the scope of electronically supplied services. In
addition, the special classification of electronically supplied services results in
different VAT rates applying between digital products and their tangible counterparts.
This differentiation is seen as discriminatory as regards the digital trade.
Secondly, determining the customers location for purposes of determining the place
of supply, relies on technology that currently does not exist, or, where it does exist, is
inadequate for this purpose. Unless technology is developed to determine the
customers residence/location with absolute accuracy, the Directive cannot be
enforced.
Thirdly, the time of supply in the case of vouchers and prepaid agreements remains
uncertain. However, the current EU proposals would appear to address this issue
adequately.
Fourthly, in the absence of exchange rate guidelines, the determination of the value
of the supply in the case of cross-border supplies in a currency other than Euro is
cumbersome.
Lastly, the enforceability of the Directive on non-EU suppliers remains a contentious
issue. The extra-territorial powers afforded to the EU might, strictly speaking, not be
in the international public interest. In addition, how and on what basis the Directive
can be enforced, is not certain. In the light of the USA Supreme Court judgment in
Quill Corp v North Dakota, 1110 any attempt to enforce the Directive on USA
established customers would be in contempt of court.
The more businesses find that cross-border trade in intangibles is an increasingly
profitable component of international trade, the more they will come into contact with
1110
229
an increasing number of tax administrations. 1111 Excessive compliance obligations

are particularly onerous for small to medium sized enterprises whose growth is
important to foster in volatile economic times. 1112 In other words, the fact that a
global solution to the taxation of e-commerce should be developed, cannot be over
emphasised. In the next chapter I shall discuss the proposals of the OECD in the
hope of their yielding a global solution.
1111
Law Review vol 38 no 1 at 83; Ward BT, Sipior JC, Bremser W, McGinty DB (2006) A Comparison of United
States and European Union Taxation of E-commerce ICEC 06 Proceedings of the 8th International Conference
on Electronic Commerce at 348.
1112
Cnossen S quoted in Jackson R (2011) EU VAT: Quo Vadis? Tax Notes International vol 62 no 13 at 999.
230
CHAPTER 5:
THE OECD
5.1 Introduction
In Chapter 4 it was established that the taxation of e-commerce is a global issue that
cannot be resolved by adopting VAT rules with extra-territorial powers in the
absence of international treaties. Furthermore, where jurisdictions modernise their
VAT rules in isolation and without having regard to international trends and interjurisdictional relationships, the modernisation is set for failure. The Organisation for
Economic Co-operation and Development (OECD) is an international body that
concerns itself with the promotion of policies that will improve the social and
economic well-being of people around the world. It provides a forum for governments
to work together, share experiences, and seek solutions to common problems. One
of its various areas of research is the taxation (more specifically consumer taxes) on
cross-border electronic transactions. Despite the fact that South Africa is not a
member of the OECD, the bodys proposals should be considered in the process of
modernising South Africas VAT rules to bring them in line with international trends in
finding a global solution for the taxation of cross-border digital trade. The OECD and
South Africa do, however, have close relations through the OECDs enhanced
engagement programme.
In this chapter I first discuss the history of the OECD and its involvement in research
on consumer taxation of cross-border e-commerce. I then discuss the OECD
proposals with the aim of identifying a solution to the compliance issues currently
experienced under both the South African VAT system and the EU system.
231
5.2 The history of the OECD
In 1947, shortly after World War II, the Organisation for European Economic
Cooperation (OEEC) was formed to implement the USA-funded Marshall Plan for the
reconstruction of a continent ravaged by war. 1113 Encouraged by the successes of
the OEEC and the prospect of carrying its work to the global front, Canada and the
USA joined the OEEC on 30 September 1961 and formed the OECD. 1114 Various
countries have since joined the OECD and the current membership stands at 34
member countries. 1115
The OECDs work is generally based on the continued monitoring of global events
and includes the medium to long-term projection of economic developments. 1116 The
OECD secretariat collects and analyses data after which committees are appointed
to discuss policy on the information and make recommendations to the Council. 1117
Council takes decisions which are then recommended to governments for
implementation on a national level. 1118
The OECD traditionally promotes tax reform in the international income tax arena
through the implementation of and commentary on its model tax treaty. 1119 This
mandate stems from article 1 of the Convention that was signed in Paris (Paris
Convention) on 14 December 1960. 1120 In terms of the Paris Convention, the OECD
shall promote policies-
1113
OECD History http://www.oecd.org/about/history/ [accessed on 12 November 2012].

1115
These member countries are Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico,
Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland,
Turkey, United Kingdom, and United States of America.
http://www.oecd.org/general/listofoecdmembercountries-ratificationoftheconventionontheoecd.htm
1116
1117
1118
1119
Cockfield AJ (2006) The Rise of the OECD as Informal World Tax Organization through National Responses
to E-commerce Tax Challenges Yale Journal of Law and Technology vol 8 at 148.
1120
OECD (1998) Harmful Tax Competition:An Emerging Global issue
http://www.oecd.org/tax/transparency/44430243.pdf [accessed on 15 April 2013].
1114
232
to achieve the highest sustainable economic growth and employment and a rising
standard of living in Member countries, while maintaining financial stability, and thus to
contribute to the development of the world economy;
to contribute to sound economic expansion in Member as well as non-member
countries in the process of economic development; and
to contribute to the expansion of world trade on a multilateral, non-discriminatory basis
in accordance with international obligations.
1121
Generally, apart from the Canada-USA treaty, no model treaty or bilateral agreement
exists that covers VAT. 1122 Since the rise of e-commerce in the late 1990s, a need
for tax reform in the field of VAT has gained support among OECD members. 1123 As
a result, the OECD pursued its mandate to promote reform efforts for VAT. The
OECD contributes to the efficient design and operation of VAT systems through
policy analysis and advice. 1124 It further develops international VAT/Sales tax
guidelines as an international standard for cross-border trade to minimise the risk of
double taxation or under-taxation. 1125 These guidelines are based on the principles
of a good tax namely neutrality, efficiency, legal security, simplicity, equity, and
flexibility. 1126
5.3 The OECD proposals on consumption taxes on cross-border e-commerce
Following the Ottawa Conference on e-commerce in 1998, the OECDs Committee

on Fiscal Affairs (CFA) adopted the Guidelines on Consumption Taxation of Cross-
1121
OECD (1998) Harmful Tax Competition:An Emerging Global issue

1122
to E-commerce Tax Challenges Yale Journal of Law and Technology vol 8 at 148.
1123
to E-commerce Tax Challenges Yale Journal of Law and Technology vol 8 at 148; Schenk A and Oldman O
(2007) Value Added Tax: A Comparative Approach at 213-214.
1124
OECD Consumption Tax http://www.oecd.org/ctp/consumptiontax/articlesonvat.htm [accessed on 12
November 2012].
1125
OECD Consumption Tax http://www.oecd.org/ctp/consumptiontax/articlesonvat.htm [accessed on 12
November 2012].
1126
233
Border Services and Intangible Property in the Context of E-commerce 1127 which
was endorsed by the Consumption Tax Guidance Series. 1128 It has, however,
become clear that the problems associated with the application of VAT on the supply
of intangible goods are, in the main, rooted in the remaining differing approaches in
certain jurisdictions. This has exacerbated the possibility of double taxation and
under-taxation. 1129 As a result, in January 2006, the CFA adopted a set of basic
principles for the development of the OECD International VAT/GST Guidelines. 1130
The development of the guidelines is a long-term project that aims to cover a broad
spectrum of cross-border trade VAT issues. 1131
In the discussion that follows I examine the OECD proposals on the taxation of
cross-border digital sales by addressing the following issues:
a) Is there a supply of goods or services?
b) Where is the supply made?
c) When is the supply made?
d) What is the value of the supply?
e) Is it made by a taxable entity?
f) Is it made in the course or furtherance of an enterprise?
g) Is the supply taxable?
h) How is VAT on the transaction collected?
1127
OECD (2001) Guidelines on Consumption Taxation of Cross-Border Services and Intangible Property in the
Context of E-commerce http://www.oecd.org/tax/consumptiontax/5594831.pdf [accessed on 12 November
2012]; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 212-213.
1128
OECD (2010) What are the OECD International VAT/GST Guidelines? at 3
http://www.oecd.org/tax/consumptiontax/48077011.pdf [accessed on 12 November 2012]; Schenk A and
Oldman O (2007) Value Added Tax: A Comparative Approach at 212-213.
1129
http://www.oecd.org/tax/consumptiontax/48077011.pdf [accessed on 12 November 2012].
1130
1131
234
As digitised products cannot be handled in the traditional sense, they are not
subject to the same customs controls as their tangible counterparts. 1132 Although the
customer may create a tangible product from the digitised product, the product is
intangible when it is initially received. 1133 In 1998, the OECD Ministers welcomed the
proposal that the supply of intangible products, for consumption tax purposes, should
not be treated as goods 1134 a principle that is endorsed in its International
VAT/GST Guidelines. 1135 This proposal is rather vague and does not provide for
specific guidelines as to whether the sale of intangible goods should be treated as
services, royalties, or a separate category in its own right. In January 1999, the CFA
appointed the Technical Advisory Group (TAG) with a general mandate "to examine
the characterisation of various types of electronic commerce payments under tax
conventions with a view to providing the necessary clarifications in the
Commentary. 1136 In its analysis, the TAG identified 28 different categories of ecommerce transaction, each posing its own characterisation and classification
problems.
5.3.1.1 Electronic processing of tangible products
These transactions involve the electronic ordering of tangible goods that are
physically delivered to the customer through traditional means. The TAG does not
see that these types of transaction would pose any classification issues as the
1132
1134
OECD (2001) Guidelines on Consumption Taxation of Cross-Border Services and Intangible Property in the
Context of E-commerce at 1 http://www.oecd.org/tax/consumptiontax/5594831.pdf [accessed on 12
November 2012].
1135
OECD (2006) International VAT/GST Guidelines http://www.oecd.org/ctp/36177871.pdf [accessed
on 24 August 2012].
1136
OECD (2001) Tax Treaty Characterisation Issues Arising from E-commerce at 3
1133
235
products can clearly be identified as goods. 1137 Existing VAT rules on cross-border
trade continue to apply. In exceptional cases, where the parties expressly agree to
this effect, the payment may be treated as royalties and the goods as intellectual
property. 1138
5.3.1.2 Electronic ordering and downloading of digital products
These transactions involve the online ordering of digital products which are
electronically delivered and stored on the customers hard drive or other nontemporary storage device. 1139 These transactions are often the main contributors to
the confusion as to whether the sale involves the sale of services, or whether the
payment constitutes royalties for the use and enjoyment of copyright. The TAG
proposes that where the transaction permits the customer to download digitised
products (such as music, video, images, text, or software) electronically for his own
use and enjoyment, the payment is made to acquire data in the form of an electronic
transmission. 1140 The copying of the data onto the customers hard drive or nontemporary storage device, is incidental to the transaction and does not amount to the
transfer of the right to use and enjoy copyright for which royalties are payable. 1141
1137

http://www.oecd.org/ctp/consumptiontax/1923396.pdf [accessed on 12 November 2012]; Owens J
(2000) OECD TAG-Treaty Characterisation of E-commerce Payments Tax Planning International Ecommerce vol 2 no 9 at 10.
1138
1139
http://www.oecd.org/ctp/consumptiontax/1923396.pdf [accessed on 12 November 2012]; Owens J
(2000) OECD TAG-Treaty Characterisation of E-commerce Payments Tax Planning International Ecommerce vol 2 no 9 at 10.
1140
OECD (2001) Tax Treaty Characterisation Issues Arising from E-commerce at 20-21
1141
http://www.oecd.org/ctp/consumptiontax/1923396.pdf [accessed on 12 November 2012]; Owens J (2000)
OECD TAG-Treaty Characterisation of E-commerce Payments Tax Planning International E-commerce vol 2 no
9 at 4.
236
The copying is not indicative of the transfer of copyright. This classification is fully
consistent with the OECD principles of tax neutrality. 1142
5.3.1.3 Electronic ordering and downloading of digital products for purposes of

commercial exploitation of copyright
Digital products can be treated as the sale of intellectual property where the parties
have expressly agreed that the transaction includes the transfer of the right to use,
enjoy, and exploit the copyright in the data. 1143 This would typically be the case
where the data is sold to enable the purchaser to make a profit or commercial gain
from exploiting the intellectual property - for example, where music is transferred to a
movie producer who will use it in a film that is to be produced.
5.3.1.4 Updates and add-ons
In these cases, the provider of software or digital products agrees to provide the
customer with updates or add-ons to the digital products. These updates or add-ons
are not customer specific. In so far as the updates or add-ons are delivered to the
customer in a tangible form, the TAG proposes that the update or add-on should be
treated as goods. 1144 Consequently, where the updates or add-ons are delivered
electronically, as envisaged in paragraph 5.3.1.2 above, they are treated as
services. 1145
1142
Andrus JL and Merril PR (2000) Treaty Characterisation of E-commerce Payments-Comments on the TAG
Draft Tax Planning International E-commerce vol 2 no 6 at 10.
1143
Yu R (2001) Characterisation of E-commerce Transactions: A Review of TAG Final Report on Tax Treaty
Characterisation at 10 http://raymondyu.net/pub/papers/eChar.pdf [accessed on 14 November 2012]; OECD
(2001) Tax Treaty Characterisation Issues Arising from E-commerce at 21
1144
1145
237
5.3.1.5 Limited duration software and digital information licenses
In these cases, the customer receives the right to use the software or other digital
products for a limited period that is less than the expected useful lifetime of the
product. 1146 The product, and any copies thereof, are automatically deleted or
become useless at the end of the licence period. 1147 Where the software is delivered
to the customer by electronic means, the products should be treated as the supply of
services. 1148
5.3.1.6 Single-use software
In these cases, the customer receives the right to use software or any other digital
product only once. 1149 The data may be downloaded or accessed remotely. The
customer does not receive the right to make copies. 1150 This would typically be the
case of pay-per-view downloads or where a one-time password is sent to a customer
by which he may access a document or other digital product of some sort. The TAG
proposes that these products should be treated as services. 1151 Commercial
exploitation is the key feature leading to royalty classification. 1152 It therefore follows
that where a right to use software without the right to exploit it commercially, is
1146
Owens J (2000) OECD TAG-Treaty Characterisation of E-commerce Payments Tax Planning International
E-commerce vol 2 no 9 at 10.
1147
1148
1149
1150
1151
1152
238
transferred, the proceeds of the transaction should be treated as business

income. 1153
5.3.1.7 Application hosting-separate licence
Application hosting involves the granting of a perpetual licence in terms of which a

host entity loads the software copy on a server operated by the host and provides
technical support against failure. 1154 The customer can access, execute, or operate
the application remotely, or after it has been downloaded into RAM. 1155 These
applications are typically used for financial management (Payroll), human resources
management (Oracle), or any other resource management. The TAG proposes that
the digital goods and subsequent services (technical support) so supplied should be
treated as the supply of services, and not rental activities, since the supply would
mainly be the supply of data warehousing services. 1156 The TAG further proposes
that, in cases where a treaty provides for the taxation of technical support at source,
the supply of application hosting should be treated as services and not technical
support in so far as the application hosting primarily provides for data warehousing
and does not require any special technical skill or knowledge. 1157
5.3.1.8 Application hosting-bundled contract
This involves an agreement, at a single or bundled fee, in terms of which a provider,

who is also the copyright holder, allows access to one or more software application,
1153
1154
Jansen C Hosted Application http://www.techopedia.com/definition/26633/hosted-application [accessed
on 14 November 2012]; OECD (2001) Tax Treaty Characterisation Issues Arising from E-commerce at 23
1155
1156
1157
239
and hosts the application of the software on a server he owns and operates and
provides technical support for the software and hardware. 1158 The customer can
access, execute or operate the application remotely or after it has been downloaded
into RAM, and the contract is renewable upon payment of an annual fee. 1159 This
type of supply should generally be treated as a supply of services. 1160 In exceptional
circumstances, where a bilateral agreement provides for the taxation of technical
support at source, that part of the supply that constitutes technical support should be
treated differently (as technical support) from the remainder of the supply. 1161
5.3.1.9 Application service provider
These transactions involve the granting of a licence to use a software application in

the providers business of operating as an application service provider. 1162 The
customer gains access to a software application hosted on computer servers owned
and operated by the provider. 1163 The software automates a particular back-office
business function for the customer, for example, the automation of sourcing,
ordering, payment, and delivery. 1164 The provider does not supply the goods and
1158

9 at 11.
1159
1160
1161
1162
9 at 12.
1163
Mitchell B Application Service Provider
http://compnetworking.about.com/od/internetaccessproviders/g/providers_asp.htm [accessed on 14
November 2012]; OECD (2001) Tax Treaty Characterisation Issues Arising from E-commerce at 24
9 at 12.
1164
Mitchell B Application Service Provider
http://compnetworking.about.com/od/internetaccessproviders/g/providers_asp.htm [accessed on 14
November 2012]; OECD (2001) Tax Treaty Characterisation Issues Arising from E-commerce at 24
240
services, but merely provides an automation and management system for the supply
of goods and services. 1165 The customer has no control over or possession of a
software copy, and is not permitted to copy the software. 1166 This amounts to the
supply of services. 1167 Where the providers customers will have access to
copyrighted material that is hosted on the server, the TAG is of the opinion that the
use of copyright would be minimal and should be negated for purposes of classifying
the overall supply. 1168
5.3.1.10 Website hosting
Website hosting entails the offering of space on the providers server to host a
website. 1169 The customer is allowed to post and remove copyrighted material on the
website, and ownership and control of the copyright vests entirely with the
customer. 1170 The supply should be treated as the supply of services irrespective of
whether or not a bilateral agreement or treaty provides for the taxation of technical
fees at source. 1171

9 at 12.
1165
1166
1167
1168
1169
http://www.macmillandictionary.com/dictionary/american/web-hosting [accessed on 14 November 2012];
9 at 12.
1170
9 at 12.
1171
241
5.3.1.11 Software maintenance
These transactions involve the bundling of updates and technical support at a single
annual fee. 1172 In many of these agreements the principal supply involves the
updating of software, and technical support is regarded as an incidental service.
These transactions should generally, as a whole, be treated as the supply of
services. 1173 In cases where a treaty provides for the taxation of technical fees or
technical support at source, that part of the supply that constitutes technical support
should be treated separately as such. 1174 It should, however, be noted that in many
cases the supply is paid for upfront as an additional fee when the software is
purchased. It will be impossible for the supplier (and to an even greater extent for the
recipient) to determine what part of the supply constitutes updates and what part
constitutes technical support when the agreement is entered into. Unless the value
of the technical support is determined upfront, or if it is billed afterwards, the supply
could be incorrectly classified and incorrectly taxed.
5.3.1.12 Data warehousing
Data warehousing involves the storing of computer data on a remote server that is
owned and operated by the provider. 1175 The customer can access and manipulate
the data remotely and no licence fee is payable for the service. 1176 Typical
1172

9 at 12.
1173
1174
1175
th
Hoffer JA, Prescott MB, Mcfadden FR (2005) Modern Data Based Management 7 edition at 2
http://www.itu.dk/people/pagh/DBS05/OLAP-MDM-2s.pdf [accessed on 14 November 2012]; OECD (2001)
Tax Treaty Characterisation Issues Arising from E-commerce at 26
9 at 13.
1176
th
Hoffer JA, Prescott MB, Mcfadden FR (2005) Modern Data Based Management 7 edition at 2
http://www.itu.dk/people/pagh/DBS05/OLAP-MDM-2s.pdf [accessed on 14 November 2012]; OECD (2001)
242
application can be found in retail stores where an employee from one branch can
access the stock level data of another branch to enable the employee to divert stock
to his branch.
Since the fees generally payable for data warehousing do not include the payment
for the use of intellectual property or for the supply of technical support, the TAG
advises that the supply be treated as services. 1177
5.3.1.13 Customer support over a computer network
The provision of online customer support in the form of online technical information,
or a trouble shooting database in the form of FAQs, or human assistance via email,
or VOP, can create serious characterisation problems. 1178 The TAG considered
whether such support or advice could be classified as know-how, but concluded
that it should generally be treated as a service. 1179 Generally, know-how includes
the transfer of certain secret or classified information pertaining to a specific trade
that can be commercially exploited. The provision of customer support involves the
divulging of information to a customer to assist him to install, operate, or fix a product
purchased from the provider. The customer cannot further exploit the information
commercially and is limited to apply it in installing, operating, or fixing the product.
Know-how is necessary for the reproduction of a product or process. 1180
On the question of whether the support amounts to technical support for purposes of
conventions that provide for the source taxation of technical support, the TAG
Tax Treaty Characterisation Issues Arising from E-commerce at 26
9 at 13.
1177
1178
9 at 13.
1179
1180
243
suggests that the mere access to technical documentation does not involve technical
skill or knowledge. 1181 The provision of online technical assistance from a technician
or specifically trained person, requires the application of technical skill and
knowledge and could be treated as the supply of technical support. 1182
5.3.1.14 Data retrieval
In this case, the provider makes a repository of information available to customers to

search and retrieve. 1183 The customer can retrieve specific information from a vast
collection of data. 1184 The customer pays for the service which enables it to search
for specific data that it requires, satisfying the conclusion that the supply should be
treated as a service. 1185
5.3.1.15 The delivery of exclusive or high value data
Just as with the data retrieval service in paragraph 5.1.3.14 above, a repository of
information is made available to customers. Only, in this case, the provider adds
additional value to the data (not customer specific) such as the analysis of statistics
or comparison of reports, et cetera. 1186 Such reports can be electronically supplied to
1181

1182
1183
9 at 13.
1184
9 at 13.
1185
1186
9 at 14.
244
the customer or ordered and downloaded from an online catalogue. 1187 The TAG is
of the opinion that the supply does not require the application of special technical
skill or knowledge and should be treated as services. 1188
5.3.1.16 Advertising
The supply of web hosted advertisements in the form of banners, pop-ups, or

simulated scenes in online games, which allows the web user to access the
advertisers website by clicking on the advertisement, results in the supply of
services irrespective of whether or not the advertisement contains certain
copyrighted material. 1189
5.3.1.17 Electronic access to professional advice
Where a customer is granted electronic access to professional advice through email,
video
conferencing,
instant
messaging,
communication, the supply is that of services.
1190
or
any
remote
means
of
It should, however, be noted that
where the service goes beyond the mere supply of consultancy services (for
example, the transfer of know-how or the provision of technical support) it should not
be treated as the supply of services where a convention or treaty provides for special
taxation measures of specific types of service. 1191
1187

1188
1189
9 at 14.
1190
OECD (2001) Tax Treaty Characterisation Issues Arising from E-commerce at 28-29
9 at 14.
1191
245
5.3.1.18 Technical information
Where the customer is provided with undivulged technical information concerning a

product or process that is akin to a narrative description or diagrams of a confidential
or secret manufacturing process, the supply should be treated as the supply of
intellectual property and the payment therefore constitutes royalties. 1192
5.3.1.19 Information delivery
Where the provider periodically provides the customer with information electronically
in accordance with the customers needs, the supply is the supply of services. 1193
This service typically includes custom-packaged information that will suit the
customers specific needs - for example, sales statistics for the customers products
in certain areas.
5.3.1.20 Access to an interactive website
In terms of these transactions customers are granted access, against the payment of
a subscription fee, to an interactive website that allows the user to view video,
pictures, or listen to audio files. 1194 The customer interacts with the website while
online, as opposed to downloading products from the website. 1195 The supply of the
1192

9 at 14.
1193
9 at 14.
1194
9 at 14.
1195
246
interactive content to the customer is the supply of services, while the supply of any
copyrighted material to the provider is the supply of intellectual property. 1196
5.3.1.21 Online shopping portal
In terms of an online shopping portal service, the website owner hosts catalogues of
various suppliers of tangible and intangible products which the customer may use to
place orders for specific goods. 1197 No contractual relationship exists between the
customer and the website owner in respect of the goods and services ordered. 1198
The website owner merely provides an agency service for which a commission is
payable. 1199 The supply constitutes a service. 1200
5.3.1.22 Online auctions
Many items are displayed on the website and the customer concludes a contract of
sale directly with the supplier of the goods and not the website owner. 1201 The
9 at 14.
1196
1197
9 at 15.
1198
9 at 15.
1199
9 at 15.
1200
1201
9 at 15.
247
website owner is remunerated for its auction facilities by the vendor. 1202 The supply
or facility should be treated as the supply of a service. 1203
5.3.1.23 Sales referral programs
The website operator lists certain of the products of a provider of digital products as
a hyperlink on its website on which the customer can click to be linked to the
providers website and ultimately purchase items (for example, Groupon and
LivingSocial). 1204 The provider can trace the source of the link and pays the website
operator a commission as a percentage for every successful sale. 1205 The supply
constitutes the supply of services. 1206
5.3.1.24 Content acquisition transactions
In these cases, the website operator acquires news, stories, or other content against
payment from various providers to attract users to its website. 1207 Alternatively, the
website operator pays a provider to provide his website with new content. 1208 Two
1202

1203
1204
9 at 15.
1205
9 at 15.
1206
1207
9 at 15.
1208
9 at 15.
248
scenarios should be distinguished. Where the operator pays the provider for material
in which copyright either vests in the provider or in another person or entity, the
supply is treated as the supply of intellectual property for which royalties are paid. 1209
Where the operator appoints a provider to create content, and as a result of the
underlying contractual agreement, copyright in the content vests in the operator, the
supply should be treated as the supply of services. 1210 This proposal could be in
contravention of local copyright laws that do not provide for the transfer of future
works. For example, in Germany future works can only be transferred in so far as the
future exploitation methods are known at the time of conclusion of the agreement. 1211
The OECD proposal makes provision for the inverse of this transaction, namely,
where the content provider pays the website owner to display stories, news, and
data on the website. 1212 It is suggested that the supply of such content is the supply
of commercial services and should be treated as business income under article 7 of
the Model Treaty. 1213
5.3.1.25 Streamed (real-time) web-based broadcasting
Consumers can access a website from which they can view real time video or listen
to real-time audio broadcasting of copyrighted material. 1214 The broadcaster either
1209

1210
1211
Article 40(1) of the German Urheberrechtsgesetz of 9 September 1965.
1212
E-commerce vol 2 no 9 at 3; Andrus JL and Merril PR (2000) Treaty Characterisation of E-commerce PaymentsComments on the TAG Draft Tax Planning International E-commerce vol 2 no 6 at 9.
1213
E-commerce vol 2 no 9 at 3; Andrus JL and Merril PR (2000) Treaty Characterisation of E-commerce PaymentsComments on the TAG Draft Tax Planning International E-commerce vol 2 no 6 at 9.
1214
9 at 15.
249
receives a subscription fee from consumers, or generates income from

advertising. 1215 The supply constitutes the supply of services. 1216
5.3.1.26 Carriage fees
Where a content provider pays a website or network operator to have its content
displayed by the website or network operator, the copyright remains with the content
provider and is exclusively exploited for gain by the content provider. 1217 The supply
therefore constitutes a supply of services. 1218
5.3.1.27 Website subscription allowing the download of digital products
Against the payment of a subscription fee, the provider allows the customer to
download copyrighted material such as video or audio files from the providers
website. 1219 The difference between this supply and the supply in paragraph 5.3.1.20
is that the customer is allowed to download the copyrighted material on a hard disk
or other storage device. In this instance the consumer downloads the copyrighted
material for his own use and enjoyment satisfying the conclusion that the supply
should be treated as the supply of services. 1220
1215

9 at 15.
1216
1217
9 at 15.
1218
1219
1220
250
5.3.1.28 Discussion and criticism
From the outset, it should be noted that the OECD classification is primarily aimed at
the distinction between business income and royalties for income tax purposes. That
said, the classification can also be applied as a guideline or general classification
measure for electronically supplied products for VAT purposes. From the discussion
above it is clear that the OECD proposes that electronically supplied goods should,
generally, be treated as services except in those cases where the supply constitutes
the supply of intellectual property or technical support where, as a result of a
convention, treaty, or bilateral agreement, intellectual property or technical support is
taxed differently. The OECD does not propose that legislation should provide for
electronically supplied products as a specific type of service. On the one hand, the
general classification of digital supplies as services could eliminate the risk of itemspecific definitions in legislation becoming outdated. It further removes any fences
around which avoidance and tax planning can occur. Li points out that the current
characterisation simplifies classification issues and creates a sense of tax
certainty. 1221 Tadmore, however, opines that the approach does not ensure tax
certainty, but rather opens the door to tax-planning opportunities and inconsistent
results. 1222
It is not hard to imagine transactions, the status of which remain
undecided in terms of the criteria. 1223

On the other hand, since jurisdictions apply different tax rules and rates to different
categories of services, a general classification of this kind could act as a barrier to
achieving harmonised tax rules that are e-commerce specific. The classification of a
supply has a direct impact on the place of supply, value, and timing of the supply, as
well as on VAT collection methods. 1224 A general classification of digital products as
services could, accordingly, have an adverse effect on these issues. Put simply, the
same product can be treated differently in different tax jurisdictions creating an
1221
Li J (2003) International Taxation in the Age of Electronic Commerce: A Comparative Study at 444.
Tadmore N (2004) Further Discussion on Income Characterization Canadian Tax Journal vol 52 no 1 at
128 http://staging.ctf.ca/ctfweb/Documents/PDF/2004ctj/04ctj1-tadmore.pdf [accessed on 15 November
2012].
1223
Baron R (2001) Income Characterisation Tax Planning International E-commerce vol 3 no 4 at 17.
1224
Evans K (2003) Cross-border E-commerce and GST/HST: Towards International Consensus or Divergence
Canadian Journal of Law and Technology at 3 http://cjlt.dal.ca/vol2_no1/pdfarticles/evans.pdf [accessed on 15
November 2012].
1222
251
additional burden for taxpayers. It could further encourage favourable tax regime
shopping. 1225 Moreover, the disparity between the tax treatment of tangible goods
and their intangible counterpart, leads to tax inequality that could adversely affect
developing markets. 1226 This notwithstanding, Li predicts that the OECD guidelines
will provide a useful point of reference to national tax authorities in applying treaty
and domestic rules. 1227
The proposed characterisation test involves questions that are to be determined by
the transaction itself. This raises the question of subjectivity and subsequent
ambiguities and uncertainties. 1228 Charlet and Holmes opine that the contract itself
reveals much about the characterisation of the supply. 1229 However, complex and
mixed transactions will make the classification more cumbersome, and the possibility
of determining the essence of the payment with absolute certainty would further be
undermined. 1230
In avoiding complexities, the TAG guidelines narrow the test down to a distinction
between private use and commercial exploitation. Where the customer is a private
consumer, the products would likely be purchased for private use and enjoyment,
thus constituting the supply of services. A commercial purchaser is more likely to
exploit the copyright for commercial gain. This approach deviates from the OECD
definition of royalties 1231 which draws no distinction between use and enjoyment and
1225
Pedwell K (2002) Taxation of Electronic Commerce: An Assessment of the Opportunities and Challenges
Facing Taxpayers and Tax Authorities Journal of E-Business vol 1 issue 2 at 5
http://egov.ufsc.br/portal/sites/default/files/anexos/20479-20480-1-PB.pdf [accessed on 15 November 2012].
1226
Pedwell K (2002) Taxation of Electronic Commerce: An Assessment of the Opportunities and Challenges
Facing Taxpayers and Tax Authorities Journal of E-Business vol 1 issue 2 at 5
http://egov.ufsc.br/portal/sites/default/files/anexos/20479-20480-1-PB.pdf [accessed on 15 November 2012].
1227
Li J (2003) International Taxation in the Age of Electronic Commerce: A Comparative Study at 444.
1228
2012].
1229
Charlet A and Holmes D (2010) Determining the Place of Taxation of Transactions under VAT/GST: Can
Transfer Pricing Principles Help? International VAT Monitor November/December 2010 at 436
http://www.wtsfrance.fr/fr/img/Determining_the_place_of_taxation_of_transactions_under_VAT-GST__IVM_-_IBFD.pdf [accessed on 28 November 2012].
1230
2012].
1231
Article 12 of the OECD Model Tax Convention defines royalties to mean payments of any kind
received as a consideration for the use of, or the right to use, any copyright of literary, artistic or
252
commercial exploitation. 1232 In the context of electronic commerce, this could result
in many negative and unintended implications. 1233 For example, where the supplier is
deemed to be the taxable entity, it will have to indentify the tax or commercial status
of the customer to determine if the supply should be treated as a supply of services
or of intellectual property. The mere fact that a customer can be identified as a
business, does not justify the conclusion that the supply is of intellectual property. A
possibility exists that the customer acquired the products for its own use and
enjoyment. In the absence of an express agreement as to the nature of the supply,
the supplier would require insight into the ultimate use of the product by the
customer to correctly classify the supply. Tadmore notes that the OECD guidelines
do not provide sufficient guidance to resolve the practical e-commerce classification
issues, and cannot be relied upon. 1234 Baron suggests that simpler classification
would lead to greater compliance. 1235 Businesses are likely to ignore complicated
classification systems if they would result in a greater administrative burden. 1236
The TAG guidelines are further based on contemporary practices and technologies
which could soon become obsolete as technology advances and practices
change. 1237 In the context of e-commerce, the distinction between royalties and
business income (the supply of services) is an extension of an historical dispensation
that has no reason to exist and is not supported. 1238 This is clear by the fact that
scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret
formula or process, or for information concerning industrial, commercial or scientific experience.
1232
2012].
1233
2012].
1234
2012].
1235
Baron R (2001) The OECD and Consumption Taxes Part 1 Tax Planning International E-commerce vol 3 no
9 at 5.
1236
9 at 5.
1237
Tadmore N (2004) The Interaction between E-commerce and Tax Treaties re-Examined DJur Thesis, Deakin
University at 121 http://dro.deakin.edu.au/eserv/DU:30023183/tadmore-interactionbetween-2003.pdf
[accessed on 15 November 2012].
1238
Tadmore N (2004) The Interaction between E-commerce and Tax Treaties re-Examined DJur Thesis, Deakin
University at 123 http://dro.deakin.edu.au/eserv/DU:30023183/tadmore-interactionbetween-2003.pdf
253
OECD member countries like Canada, some Member States in the EU, 1239 and
Australia have all deviated from the characterisation guidelines.
The absence of definitions of services and intangibles for VAT purposes, and the
subsequent reliance on the current classification for income tax purposes, leaves
room for conflicting interpretations between jurisdictions. 1240 In addition, the
VAT/GST Guidelines do not propose to introduce a dispute resolution mechanism,
which, given the multi-jurisdictional nature of e-commerce, is indispensible. 1241
At the 1998 OECD Ministerial Conference in Ottawa, the OECD ministers endorsed
the proposal that VAT, being a consumption tax, should be levied in the jurisdiction
of consumption. 1242 Taxation at the place of consumption ensures tax neutrality and
eliminates double taxation and unintended non-taxation of consumption. 1243 As a
result, the ministers proposed that, in the case of cross-border electronic commerce,
VAT should be levied in the jurisdiction of consumption. 1244 They further proposed
that consensus should be sought on circumstances under which supplies are to be
held to be consumed in a jurisdiction. 1245
It was soon realised that these broad criteria would be impossible to implement as
each jurisdiction of consumption would have to be identified. 1246 In most cases the
1239
See para 5.2 above.

Lamensch M (2010) OECD Draft Guidelines on VAT/GST on Cross-Border Services International VAT
1241
1242
OECD (1998) Electronic Commerce: Taxation Framework Conditions at 5
1243
Hellerstein W (2003) Jurisdiction to Tax Income and Consumption in the New Economy: A Theoretical and
Comparative Perspective Georgia Law Review vol 38 fn 54 at 16; Horner FM and Hardy M (1998) " The OECD
Work on Taxation and E-commerce" Tax Planning International E-commerce Introductory issue at 27.
1244
1245
http://www.oecd.org/tax/consumptiontax/1923256.pdf [accessed on 19 November 2012]; Scheer ETH (1999)
"Electronic Commerce and VAT: The European View" Journal of International Taxation vol 10 no 3 at 17.
1246
OECD (2000) Report by the Consumption Tax Technical Advisory Group Annexe II at 4
http://www.oecd.org/tax/consumptiontax/1923240.pdf [accessed on 28 August 2012]; Lamensch M
1240
254
place of consumption cannot be determined with absolute accuracy at the time of

conclusion of the agreement, and the supplier would require insight into the
consumers ultimate use of the product to establish the place of consumption. 1247
The TAG team proposes a less accurate, but more workable, test to establish the
place of consumption for each transaction. 1248 In its proposal, it distinguishes
between B2B and B2C transactions. It should be noted that the guidelines do not
apply to services that cannot be delivered directly from a remote location (for
example, vehicle rental or hotel accommodation), or services for which the place of
consumption can be easily determined by the fact that the supplier and consumer
are physically present at the same location when the services are rendered (for
example hairdressing), or where the services are applied to fixed property. 1249
5.3.2.1 B2B transactions
The place of consumption (place of supply) for the cross-border supplies of services
and intangibles capable of direct delivery from a remote location to a non-resident
business recipient, should be the jurisdiction in which the recipient has located its
business. 1250 The non-resident business recipient is identified as the taxable person
in the jurisdiction of consumption, or the person or entity that is required to register
for VAT under national laws, or is otherwise identified as a taxable person or
(2010) OECD Draft Guidelines on VAT/GST on Cross-Border Services International VAT Monitor
vol 21 no 4 at 272; Grandcolas C (2007) VAT on the Cross-Border Trade in Services and Intangibles
Asia-Pacific Tax Bulletin vol 13 no 1 at 40.
1247
Comparative Perspective Georgia Law Review vol 38 at 16; Lamensch M (2010) OECD Draft Guidelines on
VAT/GST on Cross-Border Services International VAT Monitor vol 21 no 4 at 272.
1248
OECD (2000) Report by the Consumption Tax Technical Advisory Group Annexe II at 4
1249
OECD Commentary on Place of Consumption for Business-to-Business Supplies (Business Presence) at 2-3
1250
OECD (2001) Consumption Taxation of Cross Border Services and Intangible Property in the Context of Ecommerce at 1 http://www.oecd.org/tax/consumptiontax/5594831.pdf [accessed on 24 August 2012]; Schenk
A and Oldman O (2007) Value Added Tax: A Comparative Approach at 213.
255
entity. 1251 The business presence is the establishment (headquarters, registered

office, or branch) of the recipient to which the supply is made. 1252
Determining the business customers business presence or place of establishment in
the absence of an established relationship between the supplier and the recipient,
could prove difficult. 1253 The TAG team proposes that existing contracts and normal
commercial practices should be applied to locate the place of establishment. 1254 In
other words, the contract information or information gathering mechanisms applied in
normal business practices, should be used to locate the customers place of
establishment. This method relies on the honesty and the integrity of the customer to
provide the correct information. Unlike the European system, the OECD proposal
does not require the supplier to verify the VAT/GST registration status of the
customer. Since the preferred method of collection in the case of B2B transactions is
the reverse-charge or self assessment mechanism, the verification of the customers
VAT/GST status is crucial to prevent tax avoidance.
In the case of high value transactions, the supplier is likely to have an established
relationship with the customer and the VAT/GST registration status and location of
the customer would be known to the supplier. 1255 No additional verification of status
or location should be required in these cases. Should the customer route the
supplies to a location other than the location known to the supplier, the supplier
should not be required to trace the supply to the actual place of consumption. In
these cases the existing business agreement would be relied on to identify and
1251
OECD (2001) Consumption Taxation of Cross Border Services and Intangible Property in the Context of Ecommerce at 1 http://www.oecd.org/tax/consumptiontax/5594831.pdf [accessed on 24 August 2012].
1252
1253
Comparative Perspective Georgia Law Review vol 38 fn 163 at 51; Lamensch M (2012) Are reverse-charging
and the one-stop-scheme efficient ways to collect VAT on digital supplies? World Journal of VAT/GST Law vol
1 issue 1 at 10.
1254
OECD Commentary on Place of Consumption for Business-to-Business Supplies (Business Presence) at 3
http://www.oecd.org/tax/consumptiontax/5592717.pdf [accessed on 19 November 2012]; Lamensch M (2010)
OECD Draft Guidelines on VAT/GST on Cross-Border Services International VAT Monitor vol 21 no 4 at 273.
1255
OECD Verification of Customer Status and Jurisdiction at 2
http://www.oecd.org/ctp/consumptiontax/5574687.pdf [accessed on 19 November 2012]; Buydens S, Holmes
D, Owens J (2009) Consumption Taxation of E-commerce: 10 Years after Ottawa Tax Notes International vol
54 no 1 at 62.
256
locate the customer. 1256 A business agreement is not restricted to a written legal
contract between the parties, but includes general correspondence, service delivery
agreements, invoices, purchase orders, payment instruments, and delivery notes. 1257
It is therefore not desirable for jurisdictions to draw up a restrictive list of what should
be included in a business agreement to safely rely on the information obtained there
as an identification and location tool. 1258 Business agreements cannot be interpreted
in isolation, and surrounding agreements, documents, or circumstances can also be
consulted. 1259
Where no prior relationship exists, private customers (final consumers) may have a
financial incentive if they declare that they are registered vendors or businesses. 1260
In these cases customer declarations are not reliable. The proposal does not provide
for any guidance in the absence of any business agreement. 1261 However, the
Centre for Tax Policy and Administration (CTPA)1262 proposes three methods of
verifying the customers declaration.
5.3.2.1.1 Verification of registration numbers

i) Online verification
In jurisdictions where the vendor registration database is available online and

accessible to any member of the public - like the VIES system in Europe - the
1256
OECD (2010) OECD International VAT/GST Guidelines: International Trade in Service and Intangibles: Public
Consultation for on Draft Guidelines for Consumer Location at 8-9
1257
Consultation for on Draft Guidelines for Consumer Location at 9
1258
1259
Consultation for on Draft Guidelines for Consumer Location at 9-10
1260
1261
1262
The Centre for Tax Policy and Administration is a subcommittee within the OECD that is mandated to
research and develop tax policy documents.
257
customers VAT status can easily be verified. 1263 Online verification is, however, not
commonly available in all jurisdictions. In many cases the customers VAT
registration status is subject to privacy legislation, and tax authorities are reluctant to
divulge any information to suppliers. The disclosure of a taxpayers tax or personal
information is strictly prohibited in South Africa. 1264
To apply online verification tools requires a global approach in which all jurisdictions
make the countrys VAT/GST registration database publicly available. 1265 In addition,
an online validation system should allow for automated integration with the suppliers
systems to ensure a continuous and automated e-commerce platform. 1266 In the
absence of an online validation system, or in cases where these systems are off-line,
an alternative verification method should be applied. 1267
ii) Computation system
A computation system allows the supplier to verify the validity of a customers

VAT/GST number by applying a specified check digit technique. 1268 For example,
should the numbers in sequence be added and divided by the last digit, the result will
always yield the first digit. A computation system requires that registration numbers
should be issued in applying a specific algorithm. In addition, it should consist of
numerals only. A computation system can only be successfully applied if the same
digit check technique is applied in all jurisdictions. Unless the customers location is
known to the supplier, the supplier will be unable to apply the correct check digit
technique to verify the VAT status.
1263

1264
Section 6 of the VAT Act 89 of 1991 and sections 67 and 68 of the Tax Administration Act 28 of 2011.
1265
1266
1267
1268
258
A computation system is further limited in that the supplier can only validate the
existence of the VAT/GST registration number, and the actual registration status of
the supplier remains unknown. 1269 As with the online validation system, the
computation system cannot verify whether the customer is who he says he is. 1270
Private consumers can easily obtain the VAT/GST numbers of businesses and give
that registration number to the supplier to gain the tax incentive. Computation
systems should further guard against reverse-engineering. 1271 As a result of the
limitations of online verification systems and computation systems, additional
verification methods should be applied.
5.3.2.1.2 Indicia
Certain indicia inherent in the agreement could satisfy the conclusion that the
customer is a registered vendor or taxable person.
i) Payment system data
At present, it is unlikely that the tax status of the customer can be determined by its
credit card details. 1272 In order to combat credit card fraud, suppliers obtain little to
no information from credit card companies about the status and location of the
1269

http://www.oecd.org/ctp/consumptiontax/5574687.pdf [accessed on 19 November 2012]; Baron R (2001)
The OECD and Consumption Taxes Part 1 Tax Planning International E-commerce vol 3 no 9 at 7.
1270
1271
1272
http://www.oecd.org/ctp/consumptiontax/5574687.pdf [accessed on 19 November 2012]; Lamensch M
(2012) Are reverse-charging and the one-stop-scheme efficient ways to collect VAT on digital supplies?
World Journal of VAT/GST Law vol 1 issue 1 at 10.
259
customer. 1273 That said, the CTPA proposes that, in collaboration with credit card
companies, certain vital information - such as the location of the customer and its tax
status - could be made available to suppliers. 1274 In cases of electronic transfers
where larger amounts are involved, more information is often divulged to suppliers
and this can be used as a complementary verification method. 1275
ii) Nature of supply
The nature and quantity of the supply can be indicative of the customers tax status.
For example, where music, movies, or pictures are ordered without the embedded
intellectual property rights, this could be an indication that the customer is not a
business and/or is not likely to use the supplies to make further taxable supplies. 1276
Similarly, an order for business accounting software suggests that the customer
might be a business entity. 1277
This notwithstanding, the reasonable assumptions that may be made from the nature
of the contract have their limitations. Where anti-virus software is purchased, the
customer can be a private customer or a small to medium business. 1278 In this case
the nature of the supply would not be indicative of the customers tax status.
1273

1274
1275
1276
1277
1278
260
5.3.2.1.3 Digital certificates
Many jurisdictions issue digital tax certificates to vendors as a prerequisite for

obtaining government tenders. 1279 The integrity of the certificates can be secured by
applying secure encryption software. If these certificates were issued to all VAT/GST
vendors in the country of registration, suppliers could use software to verify the
authenticity of the certificate and determine both the tax status of the customer and
its location. 1280 Verification can be done in real time with greater reliability. 1281
5.3.2.1.4 Mismatch between self-declarations and other indicia
In cases where the information supplied by the customer in the self-declaration

contradicts the results of other indicia stemming from the agreement or other factors,
the local revenue authorities should provide domestic guidance on how to tax the
transaction. 1282 It should be noted that this proposal goes out from the premise that
the supplier can, with reasonable accuracy, determine the customers location (place
of establishment) so as to apply the special guidance applicable in that jurisdiction.
Where the customers location (place of establishment) cannot be determined as a
result of mismatches between the self-declaration and the indicia, the supplier would
be unable to apply the guidance applicable to the transaction in respect of the
relevant jurisdiction correctly.
Certain obvious indicia should allow the supplier to make presumptions in respect of
the customers tax status that are likely to reflect the true nature of events. For
example, where the customer proclaims to be a vendor in the self-declaration, but
1279

1280
1281
1282
261
fails to produce a VAT/GST registration number, the supplier can assume that the
customer is not a business/vendor.
5.3.2.1.5 Alternative place-of-supply rules
In cases where this main criterion (the customers place of establishment) would
cause distortion, competition, or avoidance, countries may apply a different criterion
to determine the place of consumption to reflect the actual place of consumption. 1283
This would be the case where supplies are routed to a branch of the recipient that is
located in a tax-free or low-tax jurisdiction, and where the supplies are further
distributed to the branch of consumption as an intra-group supply. It should,
however, be noted that place-of-supply rules are not a mechanism to undo tax
competition. That will be driven by broader forces and be open to a broader set of
policies, some of which are tax policies and some non-tax policies.
5.3.2.1.6 Intra-group supplies or subsequent supplies

i) Intra-group supplies
It is common practice among multi-national businesses, to centralise procurement in

a low-tax jurisdiction from where internationally acquired goods, services, and
intangibles are redistributed to the associated businesses within the group which are
established in different jurisdictions. The supplies between the procurement business
and the associated businesses are governed by its own business agreements, and
the transaction should be taxed under the reverse-charge mechanism in the
jurisdiction where the associated business is established. 1284 This intra-group supply
does not concern or affect the tax treatment of the transaction between the initial
1283
1284
262
supplier and the procurement business, irrespective of whether the associated

business is situated in the same jurisdiction as the initial supplier or not. 1285
ii) Subsequent supplies to third parties
Where the customer, in terms of a bona fide agreement, renders the services or
intangibles acquired from the supplier to a third party, the customer remains the
customer as identified in the principal business agreement, and it is this customers
location that determines the place of taxation. 1286 The subsequent business
agreement will determine the place of taxation for the transaction between the
customer and the third party.
iii) Supplier paid by third party
Businesses are often structured in such a way that different departments are situated
in different jurisdictions. It can, therefore, happen that a transaction between the
supplier and the customer is paid by a third party.
Example 5.1: A concludes an agreement with B in terms of which B will
supply intangibles to A in India where the intangibles will be applied in a
manufacturing process. Payment is effected by C who acts as As
paymaster in terms of the company structure. C and B are both
established in Canada.
1285
1286
263
Payment flows in themselves do not create additional supplies, nor do they alter the
supplies. They can also not reliably identify the customer or its location. 1287 The
supplier makes the supplies to the customer as identified in the business agreement
irrespective of who makes the payment. 1288 In example 5.1, the transaction will be
taxed in the jurisdiction where A is established (India), irrespective of the fact that C,
who made the payment, is located in the same jurisdiction as the supplier.
5.3.2.2 B2C transactions
In the case of a non-taxable person, or a person who is not liable to register for
VAT/GST, the place of supply is deemed to be the jurisdiction in which the customer
has his/her usual residence. 1289 The OECD recognises that this proposal negates
the consumption principle, since the place of residence and place of consumption do
not always coincide. 1290 Taxing the transaction at the location of consumption would
place a significant compliance burden on suppliers. 1291 As a result of the mobility of
communications, identifying the actual place of consumption would, in most cases
and in the absence of practical evidence, be impossible.
In contrast to locating a business customer, a non-taxable person does not have a
VAT/GST registration number that can be verified and used to locate its place of
residence. The CTPA recommends that tax authorities develop national guidelines to
assist suppliers in locating the customers place of residence. 1292
1287 1287
OECD (2010) OECD International VAT/GST Guidelines: International Trade in Service and Intangibles:
Public Consultation for on Draft Guidelines for Consumer Location at 14
1288 1288
OECD (2010) OECD International VAT/GST Guidelines: International Trade in Service and Intangibles:
Public Consultation for on Draft Guidelines for Consumer Location at 14
1289
1290
1291
1292
264
5.3.2.2.1 Self-declaration
As it was indicated above, reliance on the customers self-declaration as a single

method of locating the customers place of residence, is not effective and should not
be recommended. Customers can manipulate information to achieve the outcome
they desire in cases where it is not possible to verify the information
independently. 1293 In jurisdictions where the submission of false information in a selfdeclaration is penalised, substantial penalties could act as a deterrent to such
behaviour. 1294 Should the suppliers website contain an explicit warning of possible
penalties, customers would likely be deterred from submitting false information. 1295
The OECD does not explicitly recommend that jurisdictions impose penalties on the
submission of false information in self-declaration, but the notion is endorsed. Not all
customers would manipulate information to achieve a certain outcome. The selfdeclaration could, accordingly, in most cases, provide accurate and detailed
information about the customer. That said, the risk factor requires that other methods
of locating the customers place of residence be used in conjunction with the selfdeclaration to verify the information so obtained.
5.3.2.2.2 Payment information/Billing information
Given considerations of security, payment systems will, as I have indicated

previously, in future assist little in establishing the customers location. Banks and
credit card companies no longer provide suppliers with the customers details save
for proof of payment. The card numbering system used by credit card companies
does not identify the card holders jurisdiction of residence. 1296 Financial institutions
1293

1294
1295
1296
OECD (2000) Report by the Technology Technical Advisory Group at 45
http://www.oecd.org/tax/consumptiontax/1923248.pdf [accessed on 11 December 2012]; Baron R (2001)
265
would be in breach of their privacy code of conduct were the customers details to be
disclosed to suppliers. 1297 Furthermore, credit card holders are not necessarily
resident in the jurisdiction where the card is issued, nor can it be guaranteed that
consumption will take place in the country of issue of the card. 1298 It is common for
consumers who, for business purposes, temporarily reside in a different jurisdiction,
to retain credit cards issued in the country of their former residence. 1299 In border
regions, customers often acquire cross-border cards in jurisdictions where lower card
fees or better deals are available. 1300
In cases where a billing address is required, a correlation between the customers
jurisdiction of residence and billing is likely to exist. 1301 The billing address supplied
for payment purposes could thus be used to verify the information supplied in the
self-declaration. Where a mismatch between the billing address and the self
declaration exists, additional verification measures should be applied. The supplier
could alert the customer that a mismatch exists and that he is required to review and
correct the information. Where the addresses differ, but are both in the same
jurisdiction, it would lead to the same tax result and the mismatch can be negated.
Suppliers could, in cases where the addresses are located in different jurisdictions,
cancel the transaction in cases where the customer fails to review and correct the
information or fails to submit adequate reasons for the mismatch.
The OECD and Consumption Taxes Part 1 Tax Planning International E-commerce vol 3 no 9 at 6; Arthur S
(2000) International Perspectives on E-commerce Taxation Tax Planning International E-commerce vol 2 no
12 at 18; Lamensch M (2012) Are reverse-charging and the one-stop-scheme efficient ways to collect VAT
on digital supplies? World Journal of VAT/GST Law vol 1 issue 1 at 10.
1297
OECD (2000) Report by the Technology Technical Advisory Group at 44-45
http://www.oecd.org/tax/consumptiontax/1923248.pdf [accessed on 11 December 2012].
1298
http://www.oecd.org/tax/consumptiontax/1923248.pdf [accessed on 11 December 2012]; Arthur S (2000)
International Perspectives on E-commerce Taxation Tax Planning International E-commerce vol 2 no 12 at
18.
1299
1300
1301
266
5.3.2.2.3 Tracking/Geo-location software
Various information resources can be applied to identify the customers location

through its IP address by utilising geo-location software. 1302 When a customer types
an IP address (URL) in the browsers URL bar, the browser sends a connection
request to the IP address which in turn sends a location request to the geo-location
provider. 1303 The geo-location provider sends the customers location information,
based on the IP address on its database, to the suppliers or requested websites
server. 1304 Svantesson refers to the location identification by the geo-location
provider as an educated guess. 1305 The accuracy of geo-location technology is
difficult to assess. 1306 A disparity exists between the accuracy levels proclaimed by
software developers, and the testimony by expert witnesses in court. Geo-location
provider, Digital Element, claims that it has 99,9 per cent accuracy in respect of
country location, and 95 per cent accuracy in respect of city location. 1307 In La Ligue
Contre Racisme et LAntisemitisme v Yahoo Inc, 1308 the panel of experts testified
that around 70 per cent of IP addresses assigned to French Internet users can be
accurately matched to persons resident in France. 1309 The finding was based on
numerous exceptions, for example, where Internet users subscribe to international or
1302

1303
Svantesson DJB (2008) How Does the Accuracy of Geo-location Technologies Affect the Law? Masaryk
University Journal of Law and Technology vol 2 issue 1 at 12
http://mujlt.law.muni.cz/storage/1234798550_sb_02_svantesson.pdf [accessed on 26 November 2012].
1304
1305
1306
http://mujlt.law.muni.cz/storage/1234798550_sb_02_svantesson.pdf [accessed on 26 November 2012];
1307
http://www.digitalelement.com/our_technology/our_technology.html [accessed on 26 November 2012].
1308
La Ligue Contre Racisme et LAntisemitisme v Yahoo, Inc Tribunal de Grande Instance de Paris
No RG 00/05308 (November 20,2000).
1309
Akdenis Y (2001) Case Analysis of League Against Racism and Antisemitism (LICRA), French Union of
Jewish Students v Yahoo Inc (USA), Yahoo France Tribunal de Grande Instance de Paris (The County Court of
Paris), Interim Court Order, 20 November, 2000 Electronic Business Law Reports vol 1 issue 3 at 111
http://www.cyber-rights.org/documents/yahoo_ya.pdf [accessed on 26 November 2012].
267
private service providers. 1310 In Nitke v Ashcroft, 1311 expert witness Ben Laurie
testified that geo-location software has a maximum of 70 per cent accuracy on state
level. 1312 In most cases, the geo-location software can accurately identify the location
of customers Internet Service Provider, but the actual location of the machine/device
used by the customer cannot be established accurately. 1313 In addition, geo-location
software is dependent on information already available in its data-base. 1314
Consequently, geo-location software operates as a verification process in terms of
which the IP address submitted by the customers device or service provider, are
compared to information that was submitted by or to the customers service provider
when the customers IP address was issued or assigned. Where the information
submitted during this initial phase is false or incorrect, geo-location software would
be unable to verify its authenticity.
Circumvention software can be applied to hide the customers IP address from geolocation software or submit another machine/devices IP address to the geo-location
provider. 1315 It is trite that sophisticated circumvention technology is expensive and
not readily available to the general public. 1316 That said, anonymising technology,
although less advanced than most circumvention software, is inexpensive and
commonly used to hide or obscure the customers IP address from geo-location
1310
1311
Nitke v Ashcroft 253 F.Supp.2d 587 (S.D.N.Y. Mar 24, 2003) (NO. 01 CIV. 11476 (RMB).
1312
Laurie B (2005) Nitke v Ashcroft: Geolocation of Web Users at 10 http://www.apachessl.org/nitke.pdf [accessed on 26 November 2012].
1313
Laurie B (2005) Nitke v Ashcroft: Geolocation of Web Users at 6-10 http://www.apachessl.org/nitke.pdf [accessed on 26 November 2012].
1314
http://mujlt.law.muni.cz/storage/1234798550_sb_02_svantesson.pdf [accessed on 26 November 2012];
1315
http://mujlt.law.muni.cz/storage/1234798550_sb_02_svantesson.pdf [accessed on 26 November 2012]; Baron
R (2001) The OECD and Consumption Taxes: Part 2 Tax Planning International E-commerce vol 3 no 10 at 7.
1316
268
software. 1317 Anonymising software can assign an IP address located in a jurisdiction

best suited to the customers needs. 1318 Yet, anonymising software is limited, and the
number of countries that can be used as a smoke screen location is further
limited. 1319 These limitations do not prevent customers from choosing a location in a
low-tax jurisdiction to reap the benefits of a lower tax rate or to avoid consumption
tax altogether. The Technological TAG team, however, opines that it is unlikely that
attempts to avoid consumption taxes would attract significant numbers of customers
to anonymisers. 1320
Svantesson states that where the IP address and port number of a proxy server
located in a jurisdiction best suited to the customers needs are known to the
customer, the customers location can be hidden or obscured by changing the proxy
server information on the customers web browser. 1321
Geo-location software cannot be used in isolation to determine the customers

location. The OECD proposes that geo-location software should be used to verify the
information submitted in the customers self-declaration. 1322 While geo-location
software cannot guarantee accuracy in itself, where it is used as a secondary tool to
verify the information in the self-declaration, suppliers can achieve greater accuracy.
The CTPA suggests that jurisdictions should develop an acceptable protocol in
cases where a mismatch exists between the geo-location results and the self-
1317
1318
1319
1320
1321
1322
269
declaration. 1323 The CTPA, however, fails to indicate or suggest an acceptable

protocol.
5.3.2.2.4 Nature of supply
In some cases the nature of supply can be applied as an indicator of the customers
location. This includes a combination of factors such as language, content, and the
currency in which the transaction is completed. 1324 It should be noted that these
factors are only indicative and should not be applied as the predominant test to avoid
incorrect assessments. 1325 For example, where a resident of Spain orders a popular
novel in Dutch (in order to improve his language skills), the language and currency
could indicate that the customer is located in the Netherlands while he, in fact,
resides in Spain.
5.3.2.2.5 Digital certificates
It is trite that digital certificates offer the most accurate solution to identifying and
locating the customer. However, digital certificates are not often issued by revenue
authorities. 1326 In addition, the use of digital certificates is less common among
individuals. 1327
1323

1324
1325
Baron R (2001) The OECD and Consumption Taxes: Part 2 Tax Planning International E-commerce vol 3
no 10 at 8.
1326
1327
270
5.3.2.2.6 Constant evaluation required
As technology advances far more rapidly than legislation or policy can, the CTPA
suggests that the verification methods prescribed by jurisdictions should be regularly
re-evaluated and revised to keep pace with technological advances. 1328 One such
technological development is the use of a Universal User Profile system whereby a
users password and other identity information is stored on the Personal User
Agents database to allow the user easy access to multiple websites and
resources. 1329 Information such as the users location, language preference, file
format preference, and currency preference, can be stored on the Personal User
Agents database. 1330 When the user accesses a website, the Universal User Profile
system can, based on the information on its database, inter alia, display the text in
the preferred language, file format, and currency. 1331 Uncertainty still exists as to
how a Universal User Profile system can be applied to assist suppliers in identifying
and locating the customer. 1332 As with identification through payment systems,
security and privacy issues might prevent the Personal User Agent from disclosing
the users stored information to suppliers. Nonetheless, the CTPA is of the opinion
1328

http://www.oecd.org/ctp/consumptiontax/5574687.pdf [accessed on 19 November 2012]; Hellerstein W
(2004) Jurisdiction to Tax Income and Consumption in the New Economy: A Theoretical and Comparative
Perspective Georgia Law Review vol 38 fn 119 at 37.
1329
Kovacikova T, Petersen P, Pluke M, Bartolomeo G (2012) User Profile Management-Integration with the
Universal Communications Identifier Concept Proceedings of the 13th WSEAS International Conference on
Communications at 118 http://www.wseas.us/elibrary/conferences/2009/rodos/COMMUNICATIONS/COMMUNICATIONS18.pdf?3e3ea140 [accessed on 27
November 2012].
1330
Communications at 118 http://www.wseas.us/elibrary/conferences/2009/rodos/COMMUNICATIONS/COMMUNICATIONS18.pdf?3e3ea140 [accessed on 27
November 2012].
1331
Communications at 118-119 http://www.wseas.us/elibrary/conferences/2009/rodos/COMMUNICATIONS/COMMUNICATIONS18.pdf?3e3ea140 [accessed on 27
November 2012].
1332
271
that Universal User Profile technology should be explored as an identification and

location tool. 1333
The OECD further suggests that jurisdictions should develop identification and
location policies that are clear, but not onerous for suppliers, and are consistent with
the natural process of collecting information in business or other practices. 1334 When
policy changes are considered, revenue authorities should strive to implement
policies that ensure 100 per cent accuracy without an onerous effect on
suppliers. 1335
5.3.2.2.7 Discussion and criticism
It is trite that it would generally be onerous, if not impossible, to determine the actual
place of consumption for tax purposes in the absence of a close relationship
between the supplier and the non-taxable customer. The proposal to deem the place
of consumption to be the customers normal place of residence (in the case of
individuals), or place of establishment (in the case of businesses), could have an
adverse effect on the destination principle. This is even more so in the case of
individuals who are more mobile than businesses. Individuals often consume
supplies in a jurisdiction different from the place of residence. That said, the
impracticality of a pure consumption test warrants the proposal that the place of
residence or establishment is deemed to be the place of consumption. Greve points
out that even this rough proxy becomes difficult to apply in cases where the
customer principally exists in cyberspace. 1336 A constant review of identification and
location proxies is required to keep pace with technology. 1337 Lamensch opines that
the OECD guidelines are outdated and that the current inefficiencies have been
1333

1334
1335
1336
Greve MS (2003) Sell Globally, Tax Locally: Sales Tax Reform for the New Economy at 8-9.
1337
Greve MS (2003) Sell Globally, Tax Locally: Sales Tax Reform for the New Economy at 9.
272
ignored by the OECD. 1338 Baron proposes that businesses should only be required
to make limited efforts to establish a customers location. 1339 Once two or three tests
have been laid down, any business which applies them should be treated as having
fulfilled its obligations in locating the customer. 1340 It should further be noted that the
tests should not irritate customers, or significantly slow down the transaction
process. 1341
Ligthart opines that substantial international cooperation would be required to
prevent countries from adopting and implementing mutually inconsistent tax policies
that would lead to double taxation or unintended under or non-taxation. 1342
Consequently, the destination principle should be adopted globally in respect of
electronically supplied services or intangibles. The OECD guidelines are considered
soft-law and can merely serve as persuasive guidelines to jurisdictions in reforming
national VAT/GST legislation. 1343 Enforcing international cooperation, and moreover
enforcing the OECDs place-of-supply proposals, would be impossible in the
absence of sanctions or penalties against defaulting countries.
At the time of writing, Chapter IV (Time of supply and Attribution rules) had not been
finalised. At the First OECD Global Forum on VAT held on 7-8 November 2012 in
Paris, it was concluded that an ambitious work programme should be followed to
publish the final VAT/GST Guidelines by 2014. 1344 Nevertheless, the Technological
1338
1339
no 10 at 8.
1340
no 10 at 8.
1341
no 10 at 8.
1342
1343
Charlet A (2010) VAT Focus: Draft OECD VAT/GST Guidelines Tax Journal March at 22
1344
OECD (2012) Conclusions of the First OECD Global Forum on VAT
http://www.oecd.org/ctp/consumptiontax/conclusionsglobalforumvat.htm [accessed on 29 November 2012].
273
TAG team investigated the viability of the application of time stamping technology
that could assist revenue authorities and suppliers in determining the exact time of
supply. 1345 It was, however, established that no real commercial purpose for such
software exists, and that the cost were prohibitive for the majority of online
transactions. 1346
5.3.4 What is the value of the supply?
At the time of writing, Chapter V (Value of Supply) of the OECD International

VAT/GST Guidelines, too, had not been finalised. General inconsistency currently
exists on the treatment of vouchers in respect of the value and timing of the supply
for VAT purposes. 1347 It has been suggested that the OECD develop guidelines that
are in line with the current EU alignment on the treatment of vouchers. 1348
5.3.5 Is it made by a taxable entity?
VAT is primarily designed to tax consumption at household level. 1349 As a result of

the impracticality and the burden associated with the application of the reversecharge mechanism to individuals, businesses are required to collect the tax on
behalf of revenue authorities. 1350 In the case of cross-border supplies of services or
1345

1346
1347
Taxand (2012) Taxand Responds to OECD Discussion Draft on International VAT Neutrality Guidelines
http://www.taxand.com/files/u12/rality_Guidelines_-_26-9-2012_VMWT-1498-3309.pdf [accessed on 4
December 2012].
1348
December 2012].
1349
1350
274
intangibles, the place-of-supply rules in the case of B2B and B2C transactions
respectively should be relied on to identify the taxable entity.
5.3.5.1 B2B transactions
In terms of the OECDs principal rule, once the supplier has identified the customer
as a business entity and has located the place of the customers establishment in a
foreign jurisdiction, the supplier is relieved from the VAT burden on the
transaction. 1351 The transaction will be taxed in the customers country of jurisdiction
in terms of the reverse-charge mechanism. 1352 Put simply, the tax burden is shifted
to the business customer who is deemed to be the taxable entity. 1353
The OECD recommends that the burden of VAT should not lie on taxable
businesses unless specifically provided for in legislation. 1354 In other words, the
business, as taxable entity, should be able to recover the taxes from its customers
when it makes subsequent supplies for final home consumption. In the case of B2B
cross-border transactions the principal rule (above) cannot be applied in the light of
tax treaties which govern the type of supply. The result is that the business carries
the VAT burden in that it cannot recover the VAT paid as an input deduction.
Alternative measures are required to ensure tax neutrality. 1355 The OECD, however,
does not provide any guidelines on these alternative measures.
Circumstances under which legislation can specifically provide for the burden to be
placed on the business include, but are not limited to:
1351
OECD (2006) International VAT/GST Guidelines http://www.oecd.org/ctp/36177871.pdf

[accessed on 24 August 2012].
1352
1353
1354
OECD (2012) OECD International VAT/GST Guidelines: Draft Commentary on the International VAT
Neutrality Guidelines at 4 http://www.oecd.org/ctp/consumptiontax/50667035_ENG.pdf [accessed on 29
November 2012].
1355
Neutrality Guidelines at 4 and 7 http://www.oecd.org/ctp/consumptiontax/50667035_ENG.pdf [accessed on
29 November 2012].
275
Where the transactions concluded by the business are exempt because the
tax base of the outputs is difficult to assess (in the case of financial services),
or for policy reasons (in the case of health care and education or domestic
passenger transport). 1356 For example, where a supplier of financial services
acquires computer software, it has to account for output VAT on the import in
terms of the main rule, but would not be entitled to claim an input VAT
deduction because the supply is not acquired to make taxable supplies. 1357
The business would, furthermore, not be able to collect VAT from its
customers as it makes exempt supplies. In other words, the business carries
the VAT burden.
Where the full input deduction is not allowed because of the nature of related
transactions. 1358 This would be the case where the related transactions fall
outside the scope of VAT (no consideration paid), or where the supplies are
not wholly applied in the furtherance of the taxable business activities. 1359
Where input blocks are provided to balance the application of a lower VAT
rate where goods can either be embedded in a product or bought separately
at different rates. 1360
Where input deductions are disallowed because explicit administrative

requirements were not adhered to. 1361 For example, where insufficient
evidence is submitted to support the tax deduction. 1362
1356
November 2012].
1357
In terms of the definition of imported services in section 1 of the South African VAT Act 89 of 1991, the
tax burden, in the case of imported services, lies with the importer (business or individual) in so far as the
imported services are not utilised and consumed in the furtherance of an enterprise and in the making of
taxable supplies.
1358
November 2012].
1359
November 2012].
1360
November 2012].
1361
November 2012].
276
It should be noted that the VAT burden not only relates to the financial burden of
carrying the cost of VAT, but the cost of recovering foreign VAT creates an additional
burden on businesses. 1363 It is recommended that the OECD develop further
guidelines to minimise the additional burden on businesses. 1364
In cases where the supplier is required to register as a VAT vendor in the country in
which it makes cross-border supplies to another business, the reverse-charge
mechanism shall not apply and the supplier shall be the taxable entity. 1365 In other
words, the supply shall be treated as a domestic supply.
5.3.5.2 B2C transactions
The OECD does not provide for specific guidelines to determine the taxable entity in
the case of cross-border B2C transactions. It recognises the problems associated
with the collection of VAT on cross-border B2C transactions and the subsequent
identification of the tax collecting entity. 1366 In so far as jurisdictions require nonresident suppliers of cross-border supplies to register as VAT vendors in the
jurisdiction of supply, the non-resident supplier shall be deemed to be the taxable
entity. 1367
Where registration is not required, the customer is the taxable person under the
reverse-charge mechanism. 1368 As a result of the difficulty of enforcing compliance
1362
November 2012].
1363
December 2012].
1364
December 2012].
1365
1366
OECD (2006) International VAT/GST Guidelines http://www.oecd.org/ctp/36177871.pdf [accessed on 24
August 2012].
1367
August 2012].
1368
August 2012].
277
by non-registered taxable persons, the OECD is of the opinion that the reversecharge mechanism should not be applied in cross-border B2C transactions. 1369
The OECD is aware of the global nature of B2C transactions and the possible
eroding effect they have on the tax base if the taxable entity cannot be identified with
certainty, and if compliance cannot be enforced on that taxable entity. 1370 Member
countries should therefore strive to enhance greater international administrative
cooperation when appropriate control and enforcement measures are developed. 1371
5.3.6 Is the supply made in the course or furtherance of an enterprise?
Where the business customer would be entitled to recover output VAT for which it
must account on imports in terms of the reverse-charge mechanism, the OECD
recommends that jurisdictions should consider dispensing with the self-assessment
method. 1372 Simply put, where the business customer applies the imported
intangibles in the course and furtherance of an enterprise (in the making of taxable
supplies), it should not be required to account for output VAT upon import, and
simultaneously recover VAT as inputs. The supplier will only account for output VAT
when it makes further taxable supplies to consumers (from whom VAT will be
collected) or where the supplies acquired are not applied to make further taxable
supplies. The South African position is in line with the OECD proposal. It should,
however, be noted that while this method reduces the risk of businesses carrying the
burden of VAT, the reliance on the taxpayers interpretation of what constitutes in
the furtherance of an enterprise could increase the risk of VAT fraud or undertaxation. The self-assessment mechanism further relies on the integrity of the
taxable entity to account for output VAT on the import of intangibles in so far as they
are acquired to make exempt supplies or for final consumption. It would generally be
1369

August 2012].
1370
August 2012].
1371
August 2012].
1372
August 2012].
278
difficult for revenue authorities to verify the accuracy of the taxpayers self-assessed
tax return in the absence of practical evidence reflecting the actual use of the
intangibles.
In contrast, where the supplier accounts for VAT on every import and simultaneously
claims an input VAT deduction, revenue authorities have better control and the risk
of VAT fraud or under taxation is reduced. This can be detected if the amount of
input VAT deductions significantly or continuously exceed the amount of output VAT
on sales. 1373
However, in cases where the supplier for some or other reason cannot claim an input
VAT deduction or cannot recoup the VAT from its customers, it will carry the burden
of VAT and tax neutrality is distorted.
5.3.7 Is the supply taxable?
The identified taxable entity in cross-border trade is required to levy VAT on the
transaction at the appropriate rate. Under the OECD Model Law, jurisdictions are
allowed to exempt or zero rate certain categories of supplies in accordance with the
OECD principles on tax neutrality. 1374, 1375
The OECD does not provide specific guidelines in respect of what categories of
supplies of goods or services should be exempt or zero-rated in member countries.
1373
Alfredo J (2012) Applying VAT to International Trade-The Challenge of Economic Globalisation: The
Challenge for Tax Administrations First Meeting of the OECD Global Forum on VAT at 54
http://www.oecd.org/ctp/consumptiontax/PptpresentationsessionmaterialGFonVAT.pdf [accessed on 5
December 2012].
1374
November 2012].
1375
The OECD guidelines on tax neutrality inter alia entail that:
i) Businesses should not carry the burden of VAT except where specifically provided for in legislation;
ii) Businesses in similar situations making similar supplies should be subject to similar tax treatment;
iii) VAT rules should be framed in such a way that it does not influence business decisions;
iv) Foreign business should not be advantaged or disadvantaged compared to domestic businesses
where the tax is due and payable;
v) Foreign businesses should not incur irrecoverable VAT;
vi) Where administrative requirements for foreign businesses are deemed necessary, compliance should
not create a disproportionate on inappropriate burden.
279
In the case of cross-border trade, the main principle of tax neutrality dictates that the
supply must be taxed in the jurisdiction of consumption. 1376 This implies that supplies
are zero-rated in the country of origin and taxed in the country of destination.
In cases where non-resident vendors are required to register for VAT in the country
where they make supplies, the vendor would be required to determine if the supply is
taxable in that jurisdiction, and if so, he has further to determine the applicable rate.
This effectively requires the foreign supplier to be familiar with local VAT/GST rules
as well as foreign VAT/GST rules in every jurisdiction where it is required to register.
It could be argued that compliance under these circumstances creates a
disproportionate or inappropriate burden on the supplier resulting in a distortion of
tax neutrality. That said, resident vendors would be required to make the same
assessment in the case of local supplies. Subjecting foreign and local suppliers to
the same tax rules is in accordance with the OECD guidelines on tax neutrality.
Inadequate and inappropriate VAT collection mechanisms in cross-border trade are

the main contributors to VAT fraud and the erosion of the tax base. 1377 The OECD
recognises four essential VAT collection mechanisms: registration; collection through
a reverse-charge mechanism; taxing at source and remittance; and collection by
collecting agents. 1378 Since registration and the reverse-charge mechanism are
commonly applied in most jurisdictions, the OECD suggests that, as an interim
approach, it should be adapted (where required) and applied as the collection
1376
November 2012].
1377
Alfredo J (2012) Applying VAT to International Trade-The Challenge of Economic Globalisation: The
Challenge for Tax Administrations First Meeting of the OECD Global Forum on VAT at 54
December 2012].
1378
August 2012]; OECD (2000) Report by the Consumption Tax Technical Advisory Group at 5
280
mechanism of choice in the case of cross-border trade in intangibles. 1379 Despite the
rise of modern technology that can be applied to develop collection mechanisms,
member countries are of the opinion that the traditional collection mechanisms
remain the most effective. 1380
5.3.8.1 Registration
Under the registration mechanism, the non-resident supplier is required to register as

a VAT vendor in the foreign jurisdiction where it makes supplies which are taxable
under the VAT rules of that jurisdiction. 1381 Depending on the tax dispensation, the
non-resident supplier either pays VAT on the transaction to revenue authorities, or
collects VAT from consumers and remits it to the tax authority. 1382 The OECD
recommends that registration should, generally, not be required in the case of B2B
transactions. In the case of B2B transactions, the business customer would, under
domestic laws, be required to register for VAT in the country of establishment, and
VAT collection on imported intangibles or services can be effected through the
reverse-charge mechanism. Requiring the non-resident supplier of B2B supplies of
intangibles or services to register in the foreign jurisdiction of supply creates an
unnecessary compliance burden for the supplier while alternative, as effective but
less burdensome, collection mechanisms can be applied.
Where jurisdictions face major market distortions or the potential risk of significant
revenue losses when dealing with B2B transactions, a registration system consistent
with the national consumption tax system of that jurisdiction should be
considered. 1383 The administrative and cost burden to suppliers could be
1379

August 2012]; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 217.
1380
August 2012].
1381
August 2012].
1382
August 2012].
1383
August 2012].
281
significant. 1384 In many cases, the cost of compliance in the case of nominal value
supplies, would outweigh the benefit of international establishment. 1385 Where
registration of non-resident vendors is required, the burden on these vendors should
be minimised. 1386
Discrimination created by specific rules applicable to foreign
vendors should therefore not be disguised as compliance with these specific

rules. 1387 This can be achieved by developing a simplified registration regime for
foreign
vendors
which
includes
electronic
registration
and
declaration
procedures. 1388 Registration in organised regions can be simplified by allowing

registration in one jurisdiction only, as applies in the EU. 1389 To reduce the risk of
VAT fraud, the recovery of VAT as input VAT deductions can, under the simplified
registration dispensation, be limited or prohibited. 1390
The effectiveness of a registration system is greatly affected by the design and
application of a threshold system. 1391 To further minimise the burden on small and
micro businesses, thresholds that apply to resident vendors should be applied
equally to non-resident suppliers. 1392 In other words, the simplified registration
dispensation should not create alternative registration thresholds for non-resident
suppliers.
1384

http://www.oecd.org/tax/consumptiontax/1923248.pdf [accessed on 11 December 2012]; Baron R (2001)
The OECD and Consumption Taxes: Part 2 Tax Planning International E-commerce vol 3 no 10 at 10.
1385
1386
August 2012].
1387
Charlet A and Buydens S (2011) The OECDs Draft Guidelines on Neutrality for Value Added Taxes Tax
1388
August 2012]; OECD (2012) OECD International VAT/GST Guidelines: Draft Commentary on the International
VAT Neutrality Guidelines at 17 http://www.oecd.org/ctp/consumptiontax/50667035_ENG.pdf [accessed on
29 November 2012]; Grandcolas C (2007) VAT on the Cross-Border Trade in Services and Intangibles AsiaPacific Tax Bulletin vol 13 no 1 at 41.
1389
1390
August 2012].
1391
Oka N (2012) Specific Challenges for Tax Administrations in Applying VAT in International Trade First
Meeting of the OECD Global Forum on VAT at 81
December 2012].
1392
August 2012].
282
When registration is considered, jurisdictions should take cognisance of the need for
greater international cooperation. 1393 Existing tax, trade, and development treaties
should be considered to develop an enforceable registration regime that would not
lead to market distortions.
5.3.8.1.1 Simplified registration process
Generally, a requirement for registration is that the supplier must have a physical
presence or fixed establishment in the jurisdiction where it makes taxable supplies.
In the case of cross-border supplies of intangibles, the nature of the supply allows
the supplier to make cross-border supplies without having a physical presence or
fixed establishment in the jurisdiction where it makes the supplies. As a result,
suppliers would increasingly find themselves with VAT/GST liabilities in countries in
which they have no physical presence or fixed establishment. 1394 Where these
suppliers are required to register in the countries where they make taxable supplies,
to require a physical presence or fixed establishment would be counterproductive to
the
virtual
nature
of
e-commerce
establishments.
The
OECD,
therefore,
recommends that the simplified registration regime for the cross-border supply of
intangibles should not require the supplier to have a physical presence or fixed
establishment in the country of supply. 1395
Applicants should be allowed to complete an online registration application form that
is accessible from the revenue authoritys home page. 1396 The application form
should further be available in the official language of the applicable countrys major
1393

August 2012]; Baron R (2001) The OECD and Consumption Taxes: Part 2 Tax Planning International Ecommerce vol 3 no 10 at 10; Schenk A and Oldman O (2007) Value Added Tax: A Comparative Approach at 218.
1394
OECD (2003) Consumption Tax Guidance Series: Simplified Registration Guidance at 12
http://www.oecd.org/ctp/consumptiontax/17851117.pdf [accessed on 6 December 2012].
1395
1396
283
trading partners. 1397 In addition, the form should be standardised and the information
requested should be limited to:
i) the registered name of the business and trading name;
ii) name and contact details of the person responsible for tax administration;
iii) postal/registered address of the business and name of contact person;
iv) telephone number of contact person;
v) electronic address of contact person;
vi) website URL of business;
vii) the national tax number in the jurisdiction of establishment. 1398
Confirmation of receipt of the application, and the final registration number should be
communicated to the supplier by electronic means. 1399
The South African VAT registration system does not provide for a simplified
registration process for suppliers of cross-border intangibles. Vendors must,
amongst other requirements, have a fixed establishment with a physical presence in
the Republic. 1400 The current vendor registration regime is inconsistent with the
simplified registration proposal. It is trite that the strict VAT registration regime in
South Africa serves as a tax administration tool to combat VAT fraud and false VAT
registrations. Charlet and Buydens suggest that member countries should take
advantage of information exchange treaties as mutual assistance and debt recovery
tools, as opposed to implementing stricter registration requirements. 1401 This way
business can be relieved from burdensome compliance procedures. 1402
1397

1398
1399
1400
See paragraph 3.4.5.2 above.
1401
1402
284
5.3.8.1.2 Assessment under simplified registration regime
In addition to a simplified registration process, a simplified electronic selfassessment procedure should be available to non-resident suppliers of cross-border
intangibles. 1403 VAT declarations in the various jurisdictions vary in format, filing
periods, and filing methods. This could adversely affect business. The OECD
recommends that a standardised international declaration form and process should
be developed for vendors who are registered under the simplified registration
regime. 1404 The VAT/GST declaration form should strike a balance between the need
for simplicity, and the need for tax authorities to verify whether the tax obligations
have been fulfilled. 1405 The OECD suggests that further guidance should be given on
the frequency of tax returns. 1406
5.3.8.1.3 Record keeping under a simplified registration regime
Registered vendors are generally required to keep records of transactions to enable

tax authorities to review the data to ensure that VAT/GST has been correctly levied
and paid to the relevant tax authority. Jurisdictions are free to prescribe the method
of record keeping required by vendors. That said, the different record keeping
requirements in the different jurisdictions, of which some prohibit the electronic
storage of documents, could have an adverse effect on business. The OECD
proposes that an international standard for record keeping in the case of crossborder traders should be developed. 1407 In developing record keeping guidelines that
can ensure reliable and verifiable records that can be trusted to contain a full and
1403

1404
1405
1406
1407
285
accurate account of the electronic transaction concerned, cognisance should be

taken of existing acceptable business practices. 1408
It could be argued that the strict requirements for electronic record keeping in terms
of section 29 of the South African Tax Administration Act, 1409 place an additional
administrative burden on non-resident suppliers which is not in line with the OECD
guidelines. 1410 In terms of the OECD guidelines, record keeping in jurisdictions other
than the jurisdiction in which the documents are created, should not pose an adverse
risk to tax authorities if a standardised record keeping format (as is required in the
jurisdiction of establishment) is maintained and can be guaranteed. 1411 Record
keeping in a place other than the Republic of South Africa is, generally, prohibited
unless strict requirements are adhered to. 1412 In contrast, the EU Directive allows for
record keeping in the cloud, provided that online access can be guaranteed. Record
keeping under the EU model is less restrictive than under the South African model.
5.3.8.1.4 Enforceability of compliance / administrative burden
Enforceability of registration remains the chief challenge. In the absence of definitive

rules and international cooperation, tax collection from non compliant offshore
suppliers would be difficult to enforce. 1413 In addition, transparency in cases where
registration can be enforced, would be difficult to achieve. 1414 For example, would
1408

http://www.oecd.org/ctp/consumptiontax/17851117.pdf [accessed on 6 December 2012]; OECD Record
Keeping Guidance at 17 http://www.oecd.org/tax/taxadministration/31663114.pdf [accessed on 6 December
2012].
1409
Act 28 of 2011.
1410
See paragraph 3.4.7.1.4 above.
1411
OECD Record Keeping Guidance at 14 http://www.oecd.org/tax/taxadministration/31663114.pdf [accessed
on 6 December 2012].
1412
See paragraph 3.4.7.1.4 above.
1413
December 2012].
1414
December 2012].
286
revenue authorities have extra-territorial powers to conduct audits on non-resident

suppliers to ensure the accuracy of tax returns? Furthermore, would revenue
authorities be able to enforce penalties, interest, or other punitive measures against
non-compliance in foreign jurisdictions? Ecker opines that arbitration or similar forms
of alternative dispute resolution, should be considered to enforce extra-territorial
compliance. 1415 The negotiation of multilateral treaties, as opposed to bilateral
treaties, must be undertaken to ensure greater international and regional
cooperation. 1416
From an economic perspective, compliance under a registration dispensation would
create an additional burden on business. The administrative burden is, in most
cases, costly and could deter foreign vendors from making supplies in a particular
jurisdiction. To advance international trade, registration thresholds could be applied
in the case of small to medium cross-border enterprises. However, striking a balance
between a reduced administrative burden and the protection of the tax base would
be difficult to accomplish. 1417
5.3.8.1.5 Tax representative
Many countries, including South Africa, allow a non-resident supplier to register as a

VAT vendor in the country where the non-resident vendor has appointed a
representative taxpayer with a fixed establishment in the jurisdiction of registration.
From a business perspective, the appointment of a representative taxpayer does not
make economic sense. 1418 The representative taxpayer bears the liability towards
1415
Ecker T (2012) Considering the Future: A VAT Model Tax Treaty? First Meeting of the OECD Global Forum
on VAT at 119 http://www.oecd.org/ctp/consumptiontax/PptpresentationsessionmaterialGFonVAT.pdf
[accessed on 5 December 2012].
1416
Ecker T (2012) Considering the Future: A VAT Model Tax Treaty? First Meeting of the OECD Global Forum
on VAT at 120 http://www.oecd.org/ctp/consumptiontax/PptpresentationsessionmaterialGFonVAT.pdf
1417
December 2012].
1418
287
the tax authority for non-compliance by the non-resident supplier and receives
payment for this service. 1419 The additional cost of appointing a representative
taxpayer, benefits only the revenue authority, while both the supplier and the
representative taxpayer are burdened with additional administration and liability
risks. 1420 As a result of the high risk to the representative taxpayer, the increased
cost to the supplier, and the overall complexities associated with a representative
taxpayer system, the OECD recommends that it should be avoided in a simplified
registration regime. 1421
5.3.8.1.6 Tax processing body/trusted third party model
Rather than registering in each jurisdiction where supplies are made, the TAG team
proposes that tax authorities appoint a tax processing body with which suppliers can
register and remit taxes due. 1422 In terms of this model, the customer provides his
credit card information to the supplier, which transmits it to the online tax processing
body. 1423 The online tax processing body, based on the credit card and product
information provided by the supplier, locates and identifies the taxpayer, determines
if the product is taxable or exempt in the customers country of residence, and taxes
the transaction accordingly. 1424 The tax calculation is transmitted back to the supplier
who informs the customer that tax will be levied before the order is submitted. 1425
Upon shipment, the customers credit card is debited for the full sale amount
1419

1420
1421
1422
1423
1424
1425
288
including tax. 1426 The suppliers account is credited with the sale amount and the
online tax processing bodys account is credited with the amount of tax. 1427 The
online tax processing body remits the taxes due to the relevant tax authority and
prepares a tax report for the supplier. 1428
While this model provides greater tax certainty and reliability for suppliers (in
particular small to medium size enterprises) in that the liability is shifted from the
supplier to the online tax processing body, the OECD has identified a number of
problems inherent in this model:
i) The majority of tax systems are based on an invoice system that is not compatible
with e-commerce. It is suggested that an invoice should be replaced by a transaction
number as issued by the online tax processing body, which can be used as
reference. 1429
ii) If the model is limited to B2C transactions for intangibles, its viability is
questionable, given the high cost of establishing and maintaining an online tax
processing body. 1430
iii) The administrative cost of the online tax processing body should be reasonable
enough to eliminate the risk of non-compliance. 1431 Consequently, where the
administrative cost is recovered from the supplier, the cost should be low enough to
encourage compliance. The OECD recommends that tax authorities should fund the
administrative cost for small and medium enterprises. 1432 It is, however, questionable
whether the revenue will outweigh the overall administrative cost where alternative
tax collection options are applied. It is further likely that an online tax processing
1426

1427
1428
1429
1430
1431
1432
289
body would not be established by government despite the fact that tax collection can
be done more cheaply by government. 1433 Where the private sector is involved in the
task of tax collection, it would be driven by profit, resulting in higher costs. 1434
iv) If the model is also applied in the case of cross-border transactions of tangible
goods, the revenue gain would outweigh the administrative cost. 1435 Tangible goods
can be taxed upon shipment, and pre-cleared for customs purposes. 1436 If this model
is applied as the main tax collection method for both tangible and intangible crossborder transactions, bottlenecks at customs can be eliminated and small parcel
exemptions can be abandoned. 1437
v) VAT/GST systems are generally complicated, especially in jurisdictions where
multiple VAT rates apply. For this model to be effective, VAT/GST rules will have to
be significantly simplified. 1438 This model requires sophisticated software in the case
of complicated VAT/GST rules. Where software is not available or fails, human
intervention would be required which makes this model impractical. 1439
vi) The model relies on the supposition that the online tax processing body is able to
identify and locate the customer based on the information received by the
supplier. 1440 The customers location cannot be established through credit card
details alone. It is not clear whether the supplier or tax processing body would be
burdened with the duty of locating the customer. Since the agreement is essentially
entered into between the customer and the supplier, the supplier would be in a better
position to identify and locate the customer by applying a combination of
1433

1434
1435
1436
1437
1438
1439
1440
290
identification and location tools. As a result, the suppliers software system should be
integrated with that of the tax processing body to enable the processing body to
calculate the tax due rapidly.
This process raises privacy issues when the
customers information is transmitted to a third party. I suggest that suppliers should,

as part of the standard terms and conditions of the transaction, inform customers
that information supplied will be revealed to a trusted third party to establish and
calculate the tax consequence of the transaction. The customer should be offered
the choice of cancelling the agreement before such information is transmitted.
A variation on the stream-line registration and trusted third party model through the
implementation of a one-stop-shop, is successfully applied in the EU and, through
the Streamlined Sales and Use Tax Agreement, in the USA. 1441 In the case of the
EUs one-stop-shop regime, tax collection is effected by revenue authorities, while in
the USA, trusted third parties are appointed to collect taxes. 1442
It remains uncertain whether the registration model (or variations thereof) serves its
purpose of raising revenue and establishing competitive neutrality between resident
and non-resident suppliers of intangibles. 1443
5.3.8.2 The reverse-charge mechanism
In the case of B2B transactions where the supplying vendor is not registered or
required to register, in the jurisdiction of supply, the OECD recommends that the
self-assessment or reverse-charge mechanism should apply to the recipient
1441
Ainsworth RT (2005) Digital VAT and Development: D-VAT and D-Development Boston University School
of Law Working Paper no 06-21: Tax Notes International August at 633
1442
Ainsworth RT (2005) Digital VAT and Development: D-VAT and D-Development Boston University School
of Law Working Paper no 06-21: Tax Notes International August at 633
1443
Alexiou C and Morrison D (2004) The Cross-border Electronic Supply EU VAT Rules: Lessons for Australian
GST Revenue Law Journal vol 14 issue 1 at 148
http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1151&context=rlj&seiredir=1&referer=http%3A%2F%2Fscholar.google.co.za%2Fscholar%3Fstart%3D30%26q%3DVAT%2Bcollection
%2Bmechanisms%26hl%3Den%26as_sdt%3D1%2C5#search=%22VAT%20collection%20mechanisms%22
291
business. 1444 Generally, in the case of B2B supplies, the recipient business is a
registered VAT vendor in the country of consumption. In these cases the reversecharge mechanism is more effective because authorities can verify and enforce
compliance without difficulty. 1445 That said, where the recipient business is not a
registered vendor in the country of consumption, the reverse-charge mechanism
relies on the integrity of the recipient to declare and pay VAT which could result in
reduced effectiveness. Similarly, where the recipient business is a tax exempt entity
(exempted from levying output VAT on the making of supplies), the reverse-charge
mechanism is an ineffective tax collection model since it would mainly rely on the
honesty and integrity of the tax exempt entity to complete tax returns. The tax
exempt entity would still be required to account for VAT on the consumption of
imported services and intangibles.
In applying the reverse-charge mechanism to B2B transactions, the possible
compliance burden on foreign suppliers is effectively reduced to encourage crossborder trade. 1446 In addition, the likelihood that tax is collected from the person who
ultimately bears the burden of VAT is increased. 1447
The OECD TAG team is of the opinion that the reverse-charge mechanism is not an
optimal tax collection mechanism in the case of B2C transactions. 1448 This can
mainly be attributed to the fact that compliance relies on the integrity and honesty of
1444

August 2012]; Baron R (2001) The OECD and Consumption Taxes Part 1 Tax Planning International Ecommerce vol 3 no 9 at 7; Grandcolas C (2007) VAT on the Cross-Border Trade in Services and Intangibles
Asia-Pacific Tax Bulletin vol 13 no 1 at 40.
1445
August 2012]; OECD (2008) Applying VAT/GST to Cross-border Trade in Services and Intangibles: Emerging
Concepts for Defining Place of Consumption at 7 http://www.oecd.org/tax/consumptiontax/39874228.pdf
1446
August 2012]; OECD (2008) Applying VAT/GST to Cross-border Trade in Services and Intangibles: Emerging
Concepts for Defining Place of Consumption at 7 http://www.oecd.org/tax/consumptiontax/39874228.pdf
[accessed on 5 December 2012]; Grandcolas C (2007) VAT on the Cross-Border Trade in Services and
Intangibles Asia-Pacific Tax Bulletin vol 13 no 1 at 40.
1447
http://www.oecd.org/tax/consumptiontax/1923240.pdf [accessed on 24 August 2012]; Grandcolas C (2007)
VAT on the Cross-Border Trade in Services and Intangibles Asia-Pacific Tax Bulletin vol 13 no 1 at 40.
1448
http://www.oecd.org/tax/consumptiontax/1923240.pdf [accessed on 24 August 2012]; OECD (2000) Report
by the Technology Technical Advisory Group at 8 http://www.oecd.org/tax/consumptiontax/1923248.pdf
292
customers to report transactions and account for VAT thereon. Where customers
have become accustomed to a system where prices include VAT, they would
generally be unaware that they are in fact responsible for VAT on imported
intangibles in terms of a reverse-charge mechanism. Consumers are generally
unaware of what goods are zero or standard rated or exempt. 1449 In addition, the
cost of prosecuting defaulting individuals would in most cases outweigh the actual
revenue due. It would not take long for individuals to realise that revenue authorities
do not have the capacity to prosecute defaulting individuals. 1450 Yet, the TAG team
opines that technological changes driven by privacy issues, fraud and piracy
prevention, could transform the self-assessment mechanism into an effective tax
collection tool in B2C transactions. 1451 Smartcard technology can be applied as an
identification tool to alert the customer to the tax consequences of a transaction. 1452
Example 5.2: Country A issues every resident with an identification card in
the form of a smartcard. The smartcard contains the individuals personal
information, tax number and tax status, as well as any outstanding taxes
or traffic penalties, warrants of arrest or similar information. When the
individual purchases intangibles from a foreign supplier, he would be
required to submit the identification number to the suppliers system which
would automatically calculate the amount of tax, inform the customer of his
duty to account for VAT, and record the amount of outstanding VAT on the
identity card. Non-compliance can easily be detected when the customer
uses the card at any government institution or bank as identification. This
would enable the institution of appropriate measures against the taxpayer.
The use of smartcards raises some privacy issues. In the first instance, information
transmitted to the supplier should be limited to the essential information to identify
and locate the customer to enable the supplier to apply the correct VAT rate, and or
1449

1450
no 10 at 10.
1451
1452
293
transmit records of the transaction to the relevant revenue authority. 1453 Secondly,
only information relating the total value of the supply and the type of supply (and not
the full details of the transaction) should be transmitted to the revenue authority to
enable them to verify that VAT was accurately calculated and to identify the
taxpayer. 1454
While a smartcard system under the reverse-charge mechanism places the burden
of accounting and paying VAT solely on the customer, the liability for under-taxation
would revert to the supplier who chooses to continue with a transaction where an
outdated smartcard is used, or where the smartcard does not contain the correct tax
number. 1455 In the case of under-taxation where the smartcard was properly used,
the shortfall will be collected directly from the customer. 1456
The use of smartcard technology would, in the main, rely on greater international
cooperation between revenue authorities, governments and businesses. It is unlikely
that smartcards will be widely available in the near future. In addition, the use of
smartcards would require an extensive technological network of card readers,
software, servers, and human resources, the development and application of which
could take decades to roll out.
Until such time as smartcard technology is widely applied, the self-assessment
mechanism would be costly and ineffective to apply in B2C transactions. 1457 The
Technical TAG team further advises that transactional reporting, as opposed to
annual reporting, would create a greater burden on both consumers and tax
authorities.
Baron points out that registration of customers as individual taxpayers, could offer an
alternative in cases where an individual concludes more than a set minimum number
1453

1454
1455
1456
1457
294
of cross-border transactions. 1458 He further opines that the registration should be

linked to the existing personal tax registration of the individual to ensure the
practicality of the proposal. 1459
Some countries, such as South Africa and Canada, apply the reverse-charge
mechanism in both B2B and B2C transactions. In terms of the South African model,
reporting is required on a transactional basis, the application of which is ineffective
and not in line with the OECD proposals. 1460 Also, during the proposal stage in the
amendment of the Japanese consumption tax laws to provide for the taxation of
cross-border digital transactions, many observers pointed out that the inherent
difficulties of implementing and enforcing a reverse-charge mechanism on B2C and
B2B transactions where the business customer is a tax exempt entity, results in the
reverse-charge
mechanism
being
an
ineffective
tax
collection
model. 1461
Nevertheless, the application of the reverse-charge mechanism in B2C transactions

cannot be summarily dismissed as an inappropriate and ineffective tax collection
tool. The effectiveness thereof should continuously be assessed in the light of
available and developing technology.
5.3.8.3 Tax collection at source and remittance
In terms of this model, the supplier levies VAT/GST on the transaction in terms of the
VAT/GST rules applicable in the jurisdiction where the supply is made, and remits
tax to the revenue authority in the jurisdiction where the supplier is established. The
tax authority in the jurisdiction of source will pay the appropriate taxes to the revenue
authority in the jurisdiction of consumption. The assumption that this model would
1458
9 at 5.
1459
9 at 5.
1460
See paragraph 3.4.8.2 for a full discussion of the reverse-charge mechanism in South Africa.
1461
Uneki T (2013) Proposed VAT Amendments Affecting Software Downloads International Law Office 1
February 2013 http://www.internationallawoffice.com/Newsletters/Detail.aspx?g=e76d15bd-6c45-4e8da87b5949e82687f8&utm_source=ILO+Newsletter&utm_medium=email&utm_campaign=Corporate+Tax+Newslette
r&utm_content=Newsletter+2013-02-15 [accessed on 18 February 2013].
295
overly burden tax authorities may be overstated. 1462 For example, it is also possible
for suppliers to remit taxes directly to the revenue authority in the jurisdiction of
consumption and provide proof of payment to the local revenue authority in the
country of establishment. 1463 Suppliers would, however, prefer to remit taxes to their
local tax authorities. 1464 Revenue authorities would be reluctant to remit taxes to
other jurisdictions where the administration costs cannot be recovered. 1465 The
OECD recommends that a percentage of taxes so remitted could be withheld to
cover the administration costs incurred. 1466
Despite the fact that this model requires greater international cooperation than the
registration model, it would be premature to conclude that it holds little potential. 1467
The TAG team opines that this model, in conjunction with the online tax processing
body model, could limit the reliance on international cooperation, to cooperation on
the certification of online tax processing bodies. 1468 This could be achieved by
bilateral agreements between major trading countries.
1469
As was mentioned above,
the administrative costs of an online tax processing body could be significantly

higher than the revenue collected. Where revenue authorities would be required to
fund the online tax processing body, greater international cooperation would be
required, and the costs should be distributed as a pro rata contribution in respect of
the countrys total revenue collected through this model. Where the cost is recovered
from business, profit margins will be increased to offset the cost, resulting in higher
prices which could oust small to medium enterprises from the market.
1462

http://www.oecd.org/tax/consumptiontax/1923240.pdf [accessed on 24 August 2012]; Hinnekens L (2002)
"An Updated Overview of the European VAT Rules Concerning Electronic Commerce" EC Tax Review vol 11
issue 2 at 71.
1463
1464
1465
no 10 at 10.
1466
1467
OECD (2000) Report by the Consumption Tax Technical Advisory Group at 26-27
1468
1469
296
This model, like the registration model, relies on the suppliers ability to locate the
customers jurisdiction. 1470 In addition, the supplier would be required to be familiar
with the VAT/GST rules in the customers jurisdiction so as to apply VAT/GST at the
appropriate rate and remit this to the relevant tax authority. 1471 As I have pointed out
above, none of the identification and location tools is 100 per cent accurate resulting
in a risk of unintentional over or under-taxation. It is not clear whether suppliers
would be subject to penalties for incorrect taxation or remittance under this model.
Furthermore, in cases where the supplies are made in multiple jurisdictions,
sophisticated taxation software would be required to apply the correct tax rate
applicable to the transaction type and jurisdiction of supply.
5.3.8.4 Collection agent
Generally, payment in e-commerce transactions is effected by credit card or EFT

payments. Since the financial transaction between the customer and supplier is
already facilitated by the financial institution, the Technological TAG team has
suggested that financial institutions could be enlisted to assist revenue authorities in
tax collection on cross-border e-commerce transactions. 1472 In terms of this model
the liability to charge and collect VAT is shifted to the financial institution which
facilitates the payment. 1473 The model can be summarised as follows:
i) The taxpayer enters his credit card details on the suppliers payment system when
the order is placed.
ii) The supplier transmits the credit card details to the financial institution to effect
payment.
1470

1471
1472
1473
297
iii) The financial institution identifies and locates the customer through its database,
calculates the appropriate tax on the transaction, and transmits the information to the
supplier.
iv) The customer receives the tax quote and final price and submits the final order.
v) The customers credit card is debited with the purchase price and VAT. The
suppliers account is credited with the purchase price and the financial institution
remits the tax to the relevant revenue authority.
A number of credit card companies have already indicated to the Technological TAG
team that they do not collect the necessary data to perform the tax collection
task. 1474 Since they are not involved in the business of selling goods and services
online, financial institutions believe they are not adequately equipped to collect taxes
on these transactions. 1475 A further misconception exists among financial institutions,
that suppliers are more likely to establish the customers location with greater
accuracy through the application of the self-declaration method. 1476 As I have
pointed out above, the self-declaration method must be applied in conjunction with
other identification and location tools to verify the information supplied. Absolute
accuracy cannot be ensured even where a combination of self-declaration and other
identification and location tools are applied.
While it is trite that suppliers have access to a greater flexibility of identification and
location tools, financial institutions have direct access to their clients personal
details. 1477 In contrast to suppliers who must obtain customer details through a
combination of identification and location tools, financial institutions can obtain and
verify a customers details instantly by accessing its own database. That said, the
Technological TAG team opines that a significant change in the financial institutions
1474

http://www.oecd.org/tax/consumptiontax/1923248.pdf [accessed on 11 December 2012]; ; Arthur S (2000)
International Perspectives on E-commerce Taxation Tax Planning International E-commerce vol 2 no 12 at
18.
1475
1476
1477
298
infrastructure would be required if it is to act as tax collection agent. 1478 In addition,

the software systems of both the supplier and the financial institution should be
integrated to allow for smooth communication and instant transmission. 1479 As a
result of the identity verification and location liability on financial institutions,
transmission of information would be slowed down and business efficacy would be
affected. 1480 Financial institutions are further concerned that, due to the fact that they
are not able to ascertain the type of supply, they would be unable to levy VAT at the
appropriate rate. 1481 This is of special concern in jurisdictions where multiple rates
apply. It would not be sufficient for suppliers merely to provide a description of the
supplies to financial institutions. This would require financial institutions to correctly
classify the type of supplies in terms of the local VAT/GST rules. Sharing of
customers information with suppliers and revenue authorities further raises privacy
concerns. 1482
As a result of the significant burden that this model places on financial institutions,
coupled with the fact that a complete infrastructure change would be required, the
OECD concludes that this model is not an appropriate tax collection model. 1483
5.3.8.5 Bit tax
As an alternative to imposing consumption taxes on cross-border digital transactions,

the radical and revolutionary bit taxing model does not tax the value of the digitised
products internationally sourced, but it taxes the number of bits or bytes that are
1478

1479
1480
1481
1482
1483
299
transmitted over the Internet and received by the user. 1484 The task of tax collection
rests on the ISP that has access to information in respect of the user, his location,
and the number of bits transferred to the users device.
Bit tax has no regard for economic value as its primary objective is the taxation of
data flow, as opposed to the content of the data. 1485 This results in an unfair tax
regime. For example, a movie or music downloaded in digital form would be taxed in
the same manner as unsolicited e-mails or pop-ups. For this reason bit tax has been
rejected by most official organisations and most international tax experts because it
is not in line with the basic principles of international taxation. 1486 In terms of the
Ottawa Framework, the OECD rejects the introduction of new taxes that are
designed to tax the Internet. 1487 As a result, the bit-rate tax model should not be
considered as a possible taxing solution for cross-border trade in intangibles.
5.4 Conclusion
The OECD has established itself as an international organisation with the principal
aim of establishing tax guidelines to assist in the developing of clear tax rules,
business certainty, reducing the risk of tax avoidance and tax evasion, but also
ensuring flexibility so as to keep pace with technological advances and new business
developments. In this chapter I discussed the OECD proposals on the international
issues associated with digital cross-border trade. The purpose of the discussion was
to establish if the OECD proposals could be applied as a global solution to the
identified issues, and whether these proposals pose a workable solution for the
current South African position. Despite the fact that the OECD guidelines have no
1484
Doernberg R and Hinnekens L (1999) Electronic Commerce and International Taxation at 360; Young C and
Tsang R (1998) "Taxing Business on the Internet" Tax Planning International E-commerce Introductory issue at
10.
1485
1486
1487
Kogels HA (1999) VAT @ E-commerce EC Tax Review vol 8 issue 2 at 117; Arthur S (2000) International
Perspectives on E-commerce Taxation Tax Planning International E-commerce vol 2 no 12 at 18; Fairpo CA
(1999) "VAT in the European Union-Where are we now" Tax Planning International E-commerce vol 1 no 9 at
18; Young C and Tsang R (1998) "Taxing Business on the Internet" Tax Planning International E-commerce
Introductory issue at 10; Hinnekens L (2002) "An Updated Overview of the European VAT Rules Concerning
Electronic Commerce" EC Tax Review vol 11 issue 2 at 71.
300
legal force, they include principles that can be followed by member countries. 1488 In
addition, these principles can be used as persuasive evidence in a court of law or
other adjudicating body.
It has been established that the basic principles as laid down in the Ottawa
Framework are the key steps to building VAT/GST systems based on neutrality,
efficiency, certainty and simplicity, effectiveness and fairness, and flexibility. These
key principles include that: in cross-border trade, VAT/GST should be levied at the
jurisdiction of consumption; digital goods should not be treated as goods; and that
the reverse-charge mechanism should be applied in the case of B2B transactions.
While it has been established that these key principles offer a significant solution in
respect of South Africas lack of place-of-supply rules and the current confusion in
respect of the classification of supplies, additional issues were identified and
discussed:
i) The OECD, in proposing that intangible digital supplies should not be treated as
goods, advocates an artificial distinction between the supply of services and
royalties. This distinction further complicates the classification of digital supplies in
countries where multiple VAT rates apply. The guidelines do not provide sufficient
guidance to resolve the practical e-commerce classification issues, and cannot be
relied upon.
ii) Difficulties arise when attempting to determine the actual place of consumption,
and the OECD consequently proposes that the customers place of residence or
establishment should be accepted as a deemed place of consumption. It can be
argued that the deemed place of supply rules would eliminate most of the current
problems associated with the interpretation of utilised and consumed in the
Republic in terms of the South African VAT Act. 1489 Where the obligation of
identifying and locating the customer lies with the supplier, the application of the
OECD proposal that a combination of identification and locating tools be used, could
overburden the supplier and negatively impact on business efficacy. In addition, the
1488
1489
Act 89 of 1991.
301
possibility of penalties and interest for unintended over or under-taxation would deter
many international suppliers from making cross-border digital supplies.
iii) The OECD has not yet developed guidelines in respect of the value of supplies.
Given the fact that many cross-border digital transactions include the provision of
multiple supplies for which the determination of the value of the supply is often
complicated, definitive guidelines are required.
iv) The OECD has not developed guidelines for the timing of the supply. Many ecommerce transactions are effected by vouchers, prepaid agreements, and thirdparty payment structures which have a direct effect on the timing of the supply. It is,
therefore, essential that guidelines should be issued on the determination of the time
of supply where the timing is affected by the nature of the payment or other
conditional issues in the agreement.
v) The proposal to simplify VAT/GST systems for cross-border digital trade, and in
particular the notion of applying a uniform flat tax rate for these types of transaction,
would require international cooperation between not only OECD member countries,
but every jurisdiction on earth. Since membership to the OECD is voluntary, the
OECD acts as a toothless watchdog over the economic and social development of
nations. In other words, no sanction can be imposed on member countries (and still
less on non-members) for not implementing OECD proposals. International
cooperation of the kind required to realise this proposal would, therefore, be an
impossible goal to achieve given the current composition and powers of the OECD.
vi) Tax collection models should ideally ensure the most efficient tax collection
through the elimination of tax evasion and avoidance, and unintended over and
under-taxation without over burdening the taxable entity, and at the lowest
administrative cost to the revenue authority. The interim solution proposed by the
OECD, namely registration for B2C transactions, and self-assessment for B2B
transactions, favours revenue authorities in that it places the burden of tax collection
and the burden of administrative costs on the taxable entity. In addition, efficiency
cannot be guaranteed as it is not clear to what extent revenue authorities will be
granted extra-territorial powers to enforce cross-border VAT collection.
302
Taxing at source and remittance, whether by revenue authorities or by a trusted third

party, require international cooperation on a grand scale. Despite the fact that the
OECD recommends that cooperation can be achieved through the implementation of
bilateral agreements, it should be noted that businesses often trade with countries
other than those with which bilateral agreements have been concluded. In addition,
the cost of remittance could in most cases outweigh the revenue collected. It is
unlikely that tax authorities would fund the operational costs of an online tax
collection body. Should the operational costs be funded by business, small to
medium enterprises could be negatively affected if the costs cannot be recovered
from customers.
The conclusion that tax collection by financial institutions is not a viable option, is
based on resistance and objections received from financial institutions, and the
international perception and interpretation of privacy rights in respect of bankercustomer relationships at the time when the proposal was investigated. Current
business trends, and a shift in tax collection mechanisms at local level, justify the
conclusion that tax collection by financial institutions in the case of cross-border
digital trade should be re-investigated.
303
CHAPTER 6:
VAT COLLECTION BY BANKS
6.1 Introduction
The viability of VAT as an effective source of revenue relies chiefly on the ability to
enforce VAT rules and to collect VAT effectively on affected transactions. An ideal
tax collection model ensures the elimination of tax fraud, tax avoidance, tax evasion,
and over or under taxation at the least cost to the fiscus and without placing an
additional cost or administrative burden on the taxable entity. This might be an
illusionary ideal. Nevertheless, the registration and reverse-charge mechanisms as
VAT collection models for cross-border digital trade are not sustainable in an online
environment.
Existing VAT collection mechanisms are in dire need of modernisation, in that they
are inefficient and increasingly burdensome on revenue authorities and suppliers.
Some observers have proposed the use of financial institutions as VAT collectors
and using technology to facilitate their task. In the Chapter 5, it was established that
the OECD conclusion that VAT collection by financial institutions is not a viable
option, is based on resistance and objections from financial institutions coupled with
the general international perception of the banker-customer relationship in respect of
customer privacy prevailing when the proposal was considered. Doernberg and
Hinnekens opine that withholding taxes by financial institutions should be a method
of last resort if the registration of non-resident vendors turns out to be an ineffective
VAT accountability and collection tool. 1490 I believe that this view (as with the
concerns raised by financial institutions) was formulated on the basis of outdated
perceptions and the state of technology when it was considered. Despite the fact that
the registration mechanism has not yet given rise to serious cross-country
1490
304
coordination efforts, I believe it to be an ineffective cross-border collection

mechanism in the absence of international cooperation.
Recent technological advances, and a shift in VAT collection trends at local level,
warrant further research on the viability of VAT collection by financial institutions in
the case of cross-border digital trade.
In this Chapter I discuss VAT collection by financial institutions1491 as a viable tax
collection model for cross-border digital trade. This will be achieved by first
discussing the operation of this model, followed by a discussion of the benefits it
offers as a VAT collection mechanism on a local level with international
consequences. The main objections, concerns, and possible difficulties in
implementing the model will also be considered.
6.2 VAT collection by financial institutions: How does it work?
The basis of this model is to collect VAT on each transaction at the point at which it
is traded through an electronic payment system for example, a credit card system based on the location of the customer and the VAT rules applicable in that
jurisdiction. 1492 In other words, the customer is immediately assessed when the
transaction is entered into, and the VAT payable is transferred to the relevant
revenue authority without delay. This is typically achieved when the supplier submits
the customers credit card or other payment details to the customers bank or credit
card company, which then identifies and locates the customers place of residence or
establishment. Details of the transaction, i.e. the purchase price and type of supply,
are transmitted to the financial institution to enable it to correctly assess the
transaction based on the VAT rules applicable in the customers jurisdiction where
he resides, is established, or has a permanent address. The amount payable by the
1491
For the purpose of this thesis financial institution will be interpreted in the narrow sense to denote
banks, credit card companies, building societies or similar institutions which, as part of their ordinary duties,
make payments from a customers account to third parties on instruction of the customer.
1492
Ligthart JE (2004) Consumption Taxation in a Digital World: A Primer CentER Discussion Paper no 2004102 at 14 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=625044 [accessed on 28 November 2012];
supplies? World Journal of VAT/GST Law vol 1 issue 1 at 14-15.
305
customer is the final amount inclusive of VAT. A split-payment system separates the
payment in two: the purchase price is transferred into the suppliers bank account;
while VAT is transferred to the relevant revenue authority. This can be seen in the
schematic explanation below.
Customer
Purchase price and

tax information
Place order and

submit card details
Transmit card and transaction details
Supplier
Customer's
Financial
Institution
Transmit tax information
Pay purchase price

Pay VAT on
transaction
Suppliers Bank
Revenue Authority
Fig 6.1
Neither the supplier nor the customer is required to register with the relevant revenue
authority. Involving financial institutions in the VAT collection process is an attempt to
move VAT closer to a return-free system through the increased use of electronic
306
payment instruments. 1493 Currently, two models exist. A Blocked VAT Account
system and a Real-time VAT system.
6.2.1 Blocked VAT Account system

The Blocked VAT Account system was developed by PricewaterhouseCoopers. 1494
A Blocked VAT Account system is essentially a split payment system in terms of
which the financial institution that executes the payment, levies VAT on the
transaction, and then pays it into a blocked VAT account. 1495 The blocked VAT
account can be used for no purpose other than incoming and outgoing VAT
payments, and for VAT settlements at the end of a VAT reporting period. 1496 The
financial institution merely acts as an intermediary burdened with the task of splitting
the payment. 1497 Since the VAT collected from the customer is not deposited into the
suppliers private bank account, the risk of disappearing vendors is eliminated. 1498
The supplier is still burdened with filing tax returns at the end of a VAT reporting
period. 1499 However, the supplier will receive a partially completed assessment form
1493
Ainsworth RT and Madzharova B (2012) Real-Time Collection of Value Added Tax: Some Business and
Legal Implications Boston Univ School of Law Working Paper no 12-51 at 9
1494
1495
PricewaterhouseCoopers (2010) Study on the Feasibility of Alternative Methods for Improving and
Simplifying the Collection of VAT Through the Means of Modern Technologies and/or Financial Intermediaries
at 11
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/future_vat/vatstudy_en.pdf [accessed on 19 December 2012].
1496
1497
1498
at 11
1499
at 11
307
from the financial institution reflecting all the transactions effected by it for which VAT
was paid into the blocked account. 1500 Consequently, the more transactions are
executed through the blocked account, the less the suppliers burden in completing
VAT returns. 1501 VAT payments and refunds will be effected from and to the blocked
account. 1502 Despite the fact that VAT is collected in real-time, settlement with tax
authorities is delayed until the supplier submits an assessment at the end of a
reporting period. 1503 This system remains to be tested. Until then, I do not wish to
express a firm view in favour or against implementing this system.
6.2.2 Real-time VAT
Real-time VAT (RT-VAT) collection is most consistent with the tax collection model
by financial institutions outlined in figure 6.1 above. RT-VAT was put forward by
Chris Williams, chairman of the RTpay executive committee, a non-profit
organisation the main aim of which is to promote RT-VAT as an alternative
assessment method to the current registration and reverse-charge mechanisms. 1504
RT-VAT is a real-time VAT collection system that operates on the existing card and
payment platforms. 1505 Once the supplier has submitted the customers card details,
1500
at 11
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/future_vat/vatstudy_en.pdf [accessed on 19 December 2012]; Ainsworth RT and Madzharova B (2012) Real-Time Collection
of Value Added Tax: Some Business and Legal Implications Boston Univ School of Law Working Paper no 12-51
at 9 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166316 [accessed on 18 December 2012].
1501
1502
1503
1504
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166316 [accessed on 18 December 2012]; Jennings C
(2010) The EU VAT System-Time for a New Approach? International VAT Monitor vol 21 no 4 at 257.
1505
Legal Implications Boston Univ School of Law Working Paper no 12-51 at 17-18
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166316 [accessed on 18 December 2012]; Wohlfahrt B
(2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at 394; Ainsworth RT
308
purchase price, and transaction details to the financial institution, the financial
institution will identify and locate the customer from its database and levy VAT on the
transaction based on the VAT rate applicable in the customers jurisdiction of
residence. 1506 Payment is made directly from the customers bank account and split
into two separate payments. The purchase price is paid into the suppliers bank
account, and VAT is paid to the relevant revenue authority. 1507 Payment of VAT is
effected once every 24 hours, as opposed to the delayed payment system under the
post-transaction assessment model. 1508 A dedicated server system (Tax Authority
Settlement System (TASS)) tracks every transaction to ensure that allowable input
VAT claims in the case of B2B transactions are paid automatically. 1509 Lamensch
opines that it is hardly possible to keep track of each and every transaction
concluded on the Internet. 1510 It remains uncertain how TASS would ensure secure
and adequate tracking. The RT-VAT system remains to be tested. Until then, I do not
wish to express a firm view in favour or against implementing this system.
6.3 Benefits of VAT collection by financial institutions

6.3.1 Identification and location of customer
In the case of cross-border digital trade where the supplier is required to levy VAT on
the transaction based on the VAT rules applicable where the intangibles are
consumed or where the customer resides or is established, the supplier is required
to identify and locate the customer and or locate the place of consumption. Verifying
(2011) Technology Can Solve MTIC Fraud-VLN, RTvat, D-VAT Certification International VAT Monitor vol 22
no 3 at 157; Jennings C (2010) The EU VAT System-Time for a New Approach? International VAT Monitor vol
21 no 4 at 257.
1506
Williams C (2012) RTvat: A Real-time Solution for Improving Collection of VAT http://www.rtpay.org.php520.dfw1-2.websitetestlink.com/wp-content/uploads/2012/02/rtvathandoutv1.pdf [accessed on 18 December
2012]; Wohlfahrt B (2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at
394.
1507
2012].
1508
2012].
1509
2012].
1510
309
the customers identity and location is a difficult task. Even in cases where a
combination of identification and location tools is applied, 100 per cent accuracy
cannot be attained. It is trite that payment and credit card details, in the hands of the
supplier, do not reveal much about the customer. However, the financial institution
that executes the payment, is able to access the customers details from its
database. In terms of the know-your-customer principle, financial institutions are
required to keep records of their customers identification and place of residence. 1511
Internationally, financial institutions are prohibited from keeping anonymous
accounts or accounts in fictitious names. 1512 In South Africa, there is no specific
legislation prohibiting such a practice. However, because of the duty of record
keeping, 1513 and the reporting duties 1514 of accountable institutions1515 in terms of
1511
Financial Action Task Force (2012) International Standards on Combating Money Laundering and the
Financing of Terrorism and Proliferation:The FATF Recommendations at 14 http://www.fatfgafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%20(approved%20Februa
ry%202012)%20reprint%20May%202012%20web%20version.pdf [accessed on 20 December 2012]; Lamensch
M (2012) Unsuitable EU VAT Place of Supply Rules for Electronic Services-Proposal for an Alternative
Approach World Tax Journal vol 4 issue 1 at 89; Baron R (2002) VAT on Electronic Services: The European
Solution Tax Planning International E-commerce vol 4 no 6 at 4; Lamensch M (2012) Are reverse-charging
and the one-stop-scheme efficient ways to collect VAT on digital supplies? World Journal of VAT/GST Law vol
1 issue 1 at 13-14.
1512
Financial Action Task Force (2012) International Standards on Combating Money Laundering and the
Financing of Terrorism and Proliferation:The FATF Recommendations at 14 http://www.fatfgafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%20(approved%20Februa
ry%202012)%20reprint%20May%202012%20web%20version.pdf [accessed on 20 December 2012].
1513
Sections 21 and 22 of the Financial Intelligence Centre Act 38 of 2001 in terms of which
accountable institutions are prohibited from establishing a business relationship or entering into a
single transaction with a person or entity unless the financial institution has verified the identity and
place of residence or establishment of such person or entity.
1514
Sections 27 to 41 of the Financial Intelligence Centre Act 38 of 2001.
1515
An accountable institution means an attorney as defined in the Attorneys Act 53 of 1979; a
board of executors; a trust company; or any other person who invests, keeps in safe custody, controls
or administers trust property within the meaning of the Trust Property Control Act 57 of 1988; an
estate agent as defined in the Estate Agents Act 112 of 1976; a financial instrument trader as defined
in the Financial Markets Control Act 55 of 1989; a management company registered in terms of the
Unit Trusts Control Act 54 of 1981; a person who carries on the business of a bank as defined in the
Banks Act 94 of 1990; a mutual bank as defined in the Mutual Banks Act 124 of 1993; a person who
carries on a long-term insurance business as defined in the Long-Term Insurance Act 52 of 1998,
including an insurance broker and an agent of an insurer; a person who carries on a business in
respect of which a gambling licence is required to be issued by a provincial licensing authority; a
person who carries on the business of dealing in foreign exchange; a person who carries on the
business of lending money against the security of securities; a person who carries on the business of
rendering investment advice or investment broking services, including a public accountant as defined
in the Public Accountants and Auditors Act 80 of 1991, who carries on such a business; a person who
issues, sells or redeems travellers' cheques, money orders or similar instruments; the Postbank
referred to in section 51 of the Postal Services Act 124 of 1998; a member of a stock exchange
licenced under the Stock Exchanges Control Act 1 of 1985; the Ithala Development Finance
Corporation Limited; a person who has been approved or who falls within a category of persons
approved by the Registrar of Stock Exchanges in terms of section 4(1)(a) of the Stock Exchanges
310
the Financial Intelligence Centre Act, 1516 it is neither possible nor legally tenable for
South African banks to keep anonymous accounts.
Consequently, financial
institutions in South Africa are required to maintain a database of information

pertaining to their customers identity and location. Where payment in the case of a
cross-border digital transaction is executed by a South African financial institution, by
mere fact that the customers credit card or payment method was issued/executed
by a South African financial institution, the financial institution would be in the
position to identify the customer as a South African resident or entity established in
South Africa. In addition, in many jurisdictions, including South Africa, financial
institutions are already required to monitor and report the transfer of funds in terms
of exchange control legislation. 1517 It can, therefore, be concluded that financial
institutions, as payment facilitators in the cross-border digital trade chain, are best
equipped to verify the customers identification and location. Ligthart points out that
the customers identification cannot be ascertained if the credit card was issued by a
bank in a country with bank secrecy laws. 1518 She is not entirely correct. While it is
trite that, in these countries, the information in respect of the customers identification
and location cannot be divulged to third parties, the financial institution would still be
able to ascertain the customers identification and location despite secrecy
provisions. Further, if the bank is authorised (or rather, under compulsion of
legislation) to disclose the personal details of its customers, this will override the
common law duty of confidentiality which a bank owes its customers. Lamensch
suggests that customers should not be required to disclose their card or payment
details to the supplier who will in turn disclose the information to the financial
institution to identify and verify the customers location and tax status. 1519 Privacy,
according to Lamensch, can be ensured by applying secure payment systems. 1520 In
Control Act 1 of 1985; a person who has been approved or who falls within a category of persons
approved by the Registrar of Financial Markets in terms of section 5(1)(a) of the Financial Markets
Control Act 55 of 1989; and a person who carries on the business of a money remitter.
1516
Act 38 of 2001.
1517
Bentley D (1999) A Model for Electronic Tax Collection Tax Planning International E-commerce vol 1 no
11 at 24.
1518
1519
1520
311
terms of these systems, the customer is directed to a secure payment platform

operated by the financial institution. The customer identifies himself by submitting his
card details, and the financial institution can immediately recognise the customer
based on the information stored on its database. 1521 The financial institution only
requires the value and nature of the supply from the supplier to levy the correct
amount of VAT.
fig 6.2 1522
6.3.2 Destination and origin principle
VAT collection by financial institutions as a viable collection method is not restricted

to cross-border transactions concluded under the destination principle. 1523 Under the
origin principle, the customers bank would be required to identify the country of
1521
1522
Steiner P (1993) The New Yorker vol 69 no 20 at 61
http://www.unc.edu/depts/jomc/academics/dri/idog.html [accessed on 4 January 2013].
1523
(2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at 394.
312
origin based on the information submitted by the supplier, levy VAT on the
transaction in accordance with the rules applicable in the country of origin, and pay
VAT to the relevant revenue authority. 1524 Under the origin principle, greater
cooperation between financial institutions and various revenue authorities in different
jurisdictions is required. It should, however, be noted that the origin of the supply
(place where the supplier is established) cannot be determined with absolute
certainty. The financial institution would rely on information submitted by the supplier
who can choose to accept payment in a low VAT jurisdiction while the actual
supplies were delivered from another location or in the cloud.
Under the destination principle, the financial institution is only required to cooperate
with the revenue authority in the country where the customer is located.
Consequently, VAT is collected based on a single set of VAT rules and paid to a
single revenue authority. This is based on the premise that the customer and
financial institution are located in the same jurisdiction. In the case of a federal
system, greater cooperation might be required which could overburden financial
institutions. Ligthart opines that a national clearing house could be set up under a
federal system to assist financial institutions in transferring VAT payments to the
relevant revenue authority. 1525 While this proposal was in line with the requirements
for a clearinghouse under the now abandoned definitive regime, a clearinghouse
has never been set up. Basu points out that there is a greater likelihood of a legal
nexus existing between the financial institution and the state for which taxes are
being collected in a federal system, than would be the case where these taxes are
collected by a supplier. 1526 In other words, the system is compliant with both the
Internet Tax Freedom Act 1527 of the USA and the Quil judgment. 1528 Basu further
points out that existing debt and credit collection mechanisms, as applied by the
1524
1525
1526
Basu S (2003) Implementing E-commerce Tax Policy 18th BILETA Conference: Controlling Information in
an Online Environment at 11
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013].
1527
The Internet Tax Freedom Act, Amendment Act of 2007.
1528
Quill Corp v North Dakota (91-0194), 504 U.S. 298 (1992); Bentley D (1999) A Model for Electronic Tax
Collection Tax Planning International E-commerce vol 1 no 11 at 25.
313
financial institution in the state of incorporation - including court procedures - can be

applied to collect taxes due on a transaction. 1529 Such measures would, however,
not be required. Under both the RT-VAT and Blocked-VAT systems, VAT is
immediately levied on the transaction and recovered from the customers bank
account, leaving no opportunity for unpaid taxes that must be recovered by a debt
collection process or court procedure. Where the bank has extended credit to a
customer who has insufficient funds to cover both the purchase price and VAT, any
subsequent action to recover such money would be a claim for outstanding and
unpaid debt and not for outstanding and unpaid VAT.
6.3.3 Simplified VAT collection
In non-federal systems where the destination principle applies, financial institutions

tasked with VAT collection, are only required to account for VAT in the jurisdiction
where they are established. Simply put, VAT collection is simplified to the extent that
the financial institution applies a single set of VAT rules. This should be contrasted
against the registration method where suppliers, as VAT collectors, are required to
register in multiple jurisdictions and are further required to apply multiple VAT rules.
It should, however, be noted that it is possible for a customer to have a bank account
at a financial institution not established in the jurisdiction in which he resides. 1530 In
these cases, the financial institution would be required to apply a set of VAT rules
that applies in the foreign country where the customer resides. This could place an
additional administrative burden on the financial institution which must then
cooperate with multiple tax authorities. This, according to Lamensch should not pose
any difficulty to these financial institutions. 1531
As VAT payments are automatically transferred to revenue authorities, financial
institutions are not burdened with completing difficult VAT returns and manual
1529
1530
De Campos Amorim J (2009) "Electronic Commerce Taxation in the European Union" Tax Notes
International vol 55 no 9 at 779; Lamensch M (2012) Are reverse-charging and the one-stop-scheme
efficient ways to collect VAT on digital supplies? World Journal of VAT/GST Law vol 1 issue 1 at 15.
1531
digital supplies? World Journal of VAT/GST Law vol 1 issue 1 at 15-16.
314
payment systems. 1532 The automated payment system under the RT-VAT system
simplifies the collection and remittance process, creating a VAT collection
mechanism that places the least administrative burden on the financial institution.
6.3.4 No delays in VAT remittance

Under the RT-VAT system, VAT remittance is automated at 24 hour intervals. 1533
The transaction, VAT collection, and remittance, can effectively be completed on the
same day. However, this is not the case under the blocked VAT account model in
terms of which VAT is immediately collected but remitted to revenue authorities at
the end of a reporting period. 1534 This is similar to the registration and reversecharge models. Delays in VAT remittance negatively impact on the cashflow of
revenue authorities, and increase opportunities for VAT fraud. From the vendors
perspective, however, delays in VAT remittance may temporarily aid cash flow; at
the same time this poses a risk to the vendor that when VAT has to be remitted there
may not be cash on hand.
6.3.5 VAT fraud and unintended under-taxation eliminated
Generally, VAT fraud is associated with schemes that involve - i) the collection of
VAT on taxable transactions and the failure of suppliers to remit VAT to revenue
authorities; and ii) artificially inflated input VAT deductions that exceed outputs. 1535
Since VAT is automatically collected on transactions and automatically remitted to
1532
2012]; Lamensch M (2012) Are reverse-charging and the one-stop-scheme efficient ways to collect VAT on
digital supplies? World Journal of VAT/GST Law vol 1 issue 1 at 15-16.
1533
2012]; Wohlfahrt B (2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at
394; Ainsworth RT (2011) Technology Can Solve MTIC Fraud-VLN, RTvat,D-VAT Certification International
VAT Monitor vol 22 no 3 at 156; Jennings C (2010) The EU VAT System-Time for a New Approach?
1534
1535
Legal Implications Boston Univ School of Law Working Paper no 12-51 at 2,7
315
revenue authorities within a 24 hour cycle under the RT-VAT system, VAT fraud
opportunities are virtually eliminated. 1536 Similarly, in the case of a Blocked-VAT
account, VAT is not paid into private bank accounts eliminating the chance of VAT
fraud and simultaneously reducing the number of audits required. 1537
Under reporting of output VAT is often associated with the failure to issue invoices or
the lack of proper record keeping by suppliers. In the case of VAT collection by
financial institutions, records of transactions are kept by third parties (financial
institutions) which ensures that a sound audit trail is established, resulting in the
elimination of VAT fraud opportunities. 1538
Reliability, respectability, and creditworthiness are essential elements in a successful
third party VAT collection system. 1539 This cannot be guaranteed by a reversecharge or registration system. The principle of a fractionated VAT system operated
by a reverse-charge mechanism, poses tremendous risks of non-payment in the
case of insolvency. 1540 VAT collection by financial institutions removes the risk of
lost VAT in the case of businesses going bankrupt. 1541 In jurisdictions that provide for
1536
2012]; Ligthart JE (2004) Consumption Taxation in a Digital World: A Primer CentER Discussion Paper no
2004-102 at 14 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=625044 [accessed on 28 November
2012]; Lamensch M (2012) Unsuitable EU VAT Place of Supply Rules for Electronic Services-Proposal for an
Alternative Approach World Tax Journal vol 4 issue 1 at 90; Wohlfahrt B (2011) The Future of the European
VAT System International VAT Monitor vol 22 no 6 at 395; Lamensch M (2012) Are reverse-charging and the
one-stop-scheme efficient ways to collect VAT on digital supplies? World Journal of VAT/GST Law vol 1 issue
1 at 16.
1537
Legal Implications Boston Univ School of Law Working Paper no 12-51 at 8-9
1538
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166316 [accessed on 18 December 2012]; Kleven HJ,
Kudsen MB, Kreiner CT, Pedersen S, Saez E (2010) Unwilling or Unable to Cheat? Evidence from a Randomized
Tax Audit Experiment in Denmark NBER Working Paper Series no 15769 at 20
http://www.nber.org/papers/w15769.pdf [accessed on 21 December 2012]; Williams C (2011) Technology
Can Solve MTIC Fraud-2 International VAT Monitor vol 22 no 4 at 231; Ainsworth RT (2011) Technology Can
Solve MTIC Fraud-VLN, RTvat,D-VAT Certification International VAT Monitor vol 22 no 3 at 157.
1539
1540
Wohlfahrt B (2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at
388.
1541
316
special treatment of the fiscus as a statutory preferential creditor against the estate
of the insolvent taxpayer, complete recovery of outstanding taxes cannot be
guaranteed. Under the RT-VAT system, as VAT is collected by a third party and
immediately remitted to the relevant tax authority, the possibility that the money can
be embezzled by the supplier is eliminated. Furthermore, the trustee of the insolvent
supplier cannot argue that the money falls into the insolvent estate, and that the
revenue authority should submit a claim against the insolvent estate as a concurrent
or statutory preferrent creditor. This is because the revenue authoritys entitlement to
the money vests as soon as the transaction has been concluded, and the money is
collected on behalf of the revenue authority by the financial institution.
In the case of B2C cross-border digital trade where the reverse-charge mechanism
applies, many transactions escape the VAT net purely because taxpayers are
unaware of their statutory duty to report the transaction and remit VAT to the
revenue authority. 1542 A deferred payment system requires effective and regular
internal audits and a higher degree of compliance by taxpayers to ensure constant
VAT collection. 1543 Under the RT-VAT and Blocked-VAT account systems, B2C
cross-border transactions can be detected and taxed effectively. As this happens
during the transaction phase, the parties cannot escape VAT through a failure to
report the transaction.
Nevertheless, it should be noted that the RT-VAT and Blocked-VAT systems cannot
eliminate every form of VAT fraud. 1544 Spending all resources to eliminate every form
2012]; Basu S (2003) Implementing E-commerce Tax Policy 18th BILETA Conference: Controlling Information
in an Online Environment at 11
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Wohlfahrt B (2011) The Future of the
European VAT System International VAT Monitor vol 22 no 6 at 395.
1542
1543
Cnossen S (1998) Global Trends and Issues in Value Added Tax International Tax and Public Finance vol 5
issue 3 at 413 http://link.springer.com/article/10.1023%2FA%3A1008694529567?LI=true# [accessed on 4
January 2013].
1544
Goolsbee A and Zittrain J (1999) Evaluating the Costs and Benefits of Taxing Internet Commerce The
Berkman Center for Internet and Society Research Publication no 1999-03 5/1999 at 18
http://cyber.law.harvard.edu/sites/cyber.law.harvard.edu/files/1999-03.pdf [accessed on 3 January 2013];
317
of VAT fraud is an unrealistic approach. 1545 Goolsbee and Zittrain opine that VAT
collection by financial institutions should primarily be developed to simplify VAT
compliance and to make VAT fraud and evasion difficult to the extent that the
problem can be limited. 1546
6.3.6 Can be applied to tangible and intangible transactions
Both the RT-VAT and Blocked-VAT account systems are not restricted to the
application of cross-border trade in intangibles, but can be applied to any transaction
where funds are transferred electronically. 1547 Should these systems be applied to
cross-border trade in tangibles, possible bottlenecks during peak import times can be
avoided. Since import VAT on tangibles is generally levied on the value of the
goods, the purchase price, which must be disclosed to the financial institution, can
be used to calculate and levy VAT. This will further eliminate valuation problems by
customs where imported goods are not accompanied by invoices reflecting the
purchase price or insured value. The cost of training custom officials, and further
retaining expert and diligent officials in the system, could outweigh the revenue
collected from small parcels. Should the RT-VAT system be applied to both tangible
and intangible cross-border supplies, fewer custom officials would be required, and
expert or experienced officials could be deployed in fields where their expertise can
better be applied. Kogels points out that the popularity of mail-order and online
shopping portals will increase the flow of small parcels that cannot be checked
adequately by customs, which could lead to distortions in competition for suppliers in
local markets. 1548 This can be avoided if an RT-VAT system is applied to both
tangible and intangible cross-border supplies.
Records of the transaction and VAT collected thereon will be transmitted by the
financial institution to the supplier as proof that VAT was levied and duly paid. In the
1545
http://cyber.law.harvard.edu/sites/cyber.law.harvard.edu/files/1999-03.pdf [accessed on 3 January 2013].
1546
http://cyber.law.harvard.edu/sites/cyber.law.harvard.edu/files/1999-03.pdf [accessed on 3 January 2013].
1547
11 at 19.
1548
318
case of cross-border tangible sales, a print-out of the VAT record must be included in
the package to prevent unintended double taxation at border posts.
It is recommended that an RT-VAT collection model must be applied to both crossborder tangible and intangible trade to offset the cost of implementation and to
ensure its constant viability through periods where tangible trade is preferred to
intangible trade and vice versa.
6.4 Objections and concerns

6.4.1 No data to process transaction
While it has been established above that financial institutions are better equipped
(than suppliers) to identify and locate their customers when they facilitate payment in
the case of cross-border transactions, financial institutions are not equipped to tax
the transaction in accordance with the local tax rules applicable to the
transaction. 1549 That said, because of technological advances, the gathering of
information in order to tax a transaction is no longer limited to the supplier of the
goods or services. 1550 In jurisdictions where multiple VAT rates apply, the financial
institution would require data reflecting the value of the supply, the type of supply,
and the recipients VAT status. 1551
1549
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Hinnekens L (2002) "An Updated Overview of
the European VAT Rules Concerning Electronic Commerce" EC Tax Review vol 11 issue 2 at 71.
1550
1551
Basu S (2003) Implementing E-commerce Tax Policy 18th BILETA Conference: Controlling Information in an
Online Environment at 12
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Jenkins P (1999) VAT and Electronic
Commerce: The Challenges and Opportunities International VAT Monitor vol 10 no 1 at 5.
319
6.4.1.1 Value of the supply
Determining the value of the supply would depend on the data received from the
supplier. In the absence of a tax evasion scheme between connected persons, the
purchase price would, generally, constitute the value of the supply. Since payment to
the supplier is limited to the purchase price submitted to the financial institution,
suppliers are likely to submit the actual amount they require to make the supply. The
purchase price can be substantiated by means of an invoice.
6.4.1.2 Type of supply
In order to apply the correct VAT rate, a taxable entity is required to classify the type
of supply correctly. As I have pointed out, this is an onerous task, especially in the
absence of clear definitions. Save for facilitating payment, financial institutions are
not involved in the supply chain. Burdening financial institutions with the task to
classify the type of supply would require industry-specific data and expert knowledge
of the VAT system applicable to the supply. In a highly competitive market, suppliers
could submit false product descriptions to best suit the customers needs as regards
VAT rates. Neither financial institutions, nor revenue authorities, has the capacity to
verify that the final supply and its description match. Such an investigation would
require an extensive extra-territorial audit. Even in the absence of an underlying tax
evasion scheme, financial institutions would find it difficult to classify the type of
supply based purely on the product description submitted by the supplier.
Furthermore, the financial institution cannot rely on the classification by the supplier,
as the classification in the country of supply and the country of consumption could
differ dramatically. Furthermore, financial institutions may, for other reasons such as
conflict of laws, be reluctant or unable to act against suppliers who fail to provide the
necessary classification. Financial institutions could refuse to do further business
with these suppliers - but that is not an ideal outcome for the either the bank or the
supplier.
320
Basu suggests that an international uniform product classification should be

developed. 1552 But who would develop this uniform product classification data bases,
and would it be enforceable in all jurisdictions? Basu further suggests that the
uniform product classification system should operate on a standardised coding
formula. 1553
Under this system all stakeholders in the supply chain, including
revenue authorities, will apply a uniform standardised code assigned to products

according to their classification. 1554 Should this system be applied, financial
institutions would not be burdened with the task of classifying supplies.
Example 6.1: X (a South African resident) orders an e-book from Y (an
American supplier) and submits his credit card details to Y. Y submits the
price and internationally unified code for electronic books to the credit card
company to facilitate payment. The credit card company identifies X as a
South African resident from the available information in their database.
The system further, based on the unified code submitted to it, links the
supply to the applicable VAT rate and duly debits Xs account with the
purchase price and South African VAT.
In jurisdictions that apply multiple VAT rates, Basus suggestion creates an
opportunity for suppliers and customers to engage in tax evasion schemes. For
example, where an e-book is taxed at 0% in the customers country of residence and
computer software is taxed at 20%, a supplier and customer can collude to submit
the unified code for e-books when, in fact, computer software is being supplied. As
with the self-assessment mechanism, the classification of goods by suppliers relies
on the suppliers good faith - although to a much lesser extent. 1555 It should further
be noted that the problem of tax evasion schemes similar to the one in this example,
1552
an Online Environment at 4,8-9
1553
an Online Environment at 4,8-9
1554
11 at 18.
1555
321
is not restricted to online transactions. There are no economic arguments that

supports nonsensical rate differentiation.
Moreover, the suggestion of a unified coding system requires greater international
cooperation and sophisticated software or changes in the suppliers and financial
institutions systems. 1556 In cases where an international code has not been assigned
to a particular product or service, but where the VAT rules in the country of
consumption provide for the taxation of the transaction in question, additional
changes to the payment system would be required to facilitate the transaction. This
can be done by a dropdown list of classifications to which a country specific code
has been assigned. 1557 However, this system would constantly need to be adapted
and amended to provide for new technologies, new services, and new categories of
supply. This could negatively impact on its application.
Lamensch suggests that the financial institution should not be burdened with the task
of classifying and taxing the transaction. 1558 While this view should be supported, it
should also be noted that revenue authorities would be far keener to burden banks
(and not suppliers) with this duty. The main reason is that there are fewer banks
which are easier to monitor, than millions of suppliers worldwide. 1559 Lamensch
further suggests that the supplier must submit both the value and the amount of tax
to the financial institution. 1560 The financial institution would, therefore, merely act as
a tax collection agency. However, this suggestion raises certain issues. In order for
the supplier to submit the value and the tax to the financial institution, it must be able
to locate the supplier to calculate VAT at the rate applicable in the jurisdiction of
consumption. To establish the location with accuracy, the supplier would have to rely
on the customers location information as established by the financial institution.
Disclosure of the customers location to the supplier raises serious privacy issues in
1556
1557
11 at 19.
1558
1559
1560
322
the hands of the financial institution, resulting in the suggestion being largely unimplementable.
Further issues that need to be resolved include whether the financial institution
would be liable for penalties for incorrect taxation based on incorrect product
classification, 1561 whether a customer would have a right of recourse against the
financial institution for incorrectly collecting VAT on the transaction, 1562 and whether
a customer would be entitled to a VAT refund on transactions incorrectly taxed. 1563
6.4.1.3 Recipients VAT status
Based on the findings in the previous chapters, it can be concluded that the majority
of observers are of the view that cross-border B2B digital transactions should be
exempted from VAT. This conforms to the international practice that VAT should be
levied at consumption. However, this practice would require financial institutions (as
VAT collectors) to determine the customers VAT registration status to enable them
to levy VAT at the correct rate. It could be argued that financial institutions can rely
on the VAT status information supplied to them by the customer, or base their
conclusion on the information available in their customer database. I have pointed
out that consumers can manipulate transactions to comply with their taxing needs by
submitting false VAT registration numbers (or using the VAT number of a registered
VAT vendor) resulting in the avoidance of VAT. Even in cases where the VAT
number can be verified by means of an integrated system linked to the revenue
1561
In terms of section 59(1)(g) of the VAT Act 89 of 1991, a person who knowingly issues any tax invoice,
credit note, or debit note under the Act which is in any material respect erroneous or incomplete, commits an
offence. Where the bank acts bona fide no penalties can be raised. It should, however, be noted that the
different countries are free to provide for penalties in domestic VAT legislation.
1562
Where a customer institutes the claim against the bank, the customer would likely succeed where the
claim is based on delict or breach of contract, provided that the requirements for these claims are present and
can be proved. See for example Nedbank v Pestana (142/08) [2008] ZASCA 140 (27 November 2008). The noncustomer would base his or her claim on delict. In limited cases, provided that the requirements of the
respective enrichment claims are present and can be proved, the non-customer would likely succeed in a claim
for enrichment. To avoid unnecessary litigation, I suggest that a customers right of recourse against the bank
be limited or excluded.
1563
Section 44(2)(a) of the VAT Act 89 of 1991 provides any person who has paid any amount of tax, additional
tax, penalty, or interest in excess of the amount of tax, additional tax, penalty, or interest that should have
been charged, may apply for a refund. Where the bank has charged VAT on the transaction incorrectly, either
because of an incorrect product classification or any other reason, the recipient of the imported services may
apply for a refund of the VAT incorrectly levied and collected. Also see Stiglingh M (ed), Koekemoer AD, Van
323
authoritys taxpayer database, it would in some cases be difficult to verify if the

vendor is who he claims to be. It could be argued, that where the customers
personal information stored in a financial institutions database, and the personal
information stored in a revenue authoritys database differ, it can be assumed that
the customer is not a registered VAT vendor. This would, however, not always be the
case as the vendor could trade under one name for VAT purposes, but effect
international payment under another name or from another account not linked to its
business account.
Such an integrated system would require sophisticated software and a change in
both systems. In addition, as I have pointed out, privacy issues would prevent
revenue authorities from divulging the taxpayers personal information to financial
institutions. Therefore, even in cases where the systems are fully integrated, the
financial institution would, at best, be able to verify the existence of the VAT number
supplied.
Under a credit system, financial institutions would not be required to verify the
taxpayers status. All transactions are taxed in real-time when payment is facilitated,
irrespective of the customers tax status. Where, because of the customers tax
status, the transaction qualifies for exempted or zero rating, the customer can claim
VAT levied and paid in real-time as input credits. Under a credit system, VAT
collection by financial institutions can be simplified, VAT fraud issues eliminated, and
the taxpayers privacy can be ensured.
6.4.2 Sophisticated software / change in systems required
A dominant concern associated with real-time tax collection by financial institutions,

is that it would require sophisticated software and a change in banking systems that
must be integrated or linked to other systems. 1564 Developing and regularly updating
1564
Online Environment at 3-4
324
the required software is costly. 1565 Ainsworth points out that major technological
advances in trade, spur the need for technology-orientated reforms of VAT systems
that are efficient and have revenue maximising potential. 1566 A natural concomitant of
technology-orientated tax collection systems is the development of sophisticated
software. Consequently, a change in systems and the development of sophisticated
software is an unavoidable requirement for the development of an efficient VAT
collection mechanism for cross-border digital trade.
RTPay, a non-profit organisation, constantly develops real-time VAT collection
software for governments. 1567 These systems are designed to offer the most
efficient, cost effective, and fraud-proof methods of tax collection. 1568 The system is
swift and simple to implement, and requires minimal upfront capitalisation from
revenue authorities. 1569
In the light of the availability of real-time VAT software systems, the argument that
VAT collection by financial institutions would require the costly development of
sophisticated software does not stand up to close scrutiny.
6.4.3 Additional costs involved
Under the registration and reverse-charge models, the taxable entity (the entity
tasked to collect VAT) generally carries the administrative cost of collecting VAT on
behalf of revenue authorities. 1570 Where the taxable entity develops systems to
1565
Online Environment at 3-4
1566
1567
http://www.rtpay.org/sample-page/ [accessed on 9 January 2013].
1568
2012].
1569
2012].
1570
no 10 at 7.
325
simplify the VAT collection and remittance burden, the taxable entity bears the cost
of the development and implementation of such systems. 1571
Some observers have proposed that this general practice cannot be applied in the
case of VAT collection by financial institutions. 1572 It is suggested that the cost of
developing and implementing an integrated real-time collection system should be
borne by revenue authorities as it is the fiscus that will ultimately benefit from the
implementation. 1573
The collection of VAT necessarily involves additional administrative costs for
financial institutions for which they would expect to be compensated. 1574 Some
observers suggest that financial institutions should be compensated for their
services. 1575 The proposed compensation rates should be negotiated and paid for on
a per transaction basis in the form of a transactional fee. 1576 This could lead to a
1571
no 10 at 7.
1572
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Baron R (2001) The OECD and Consumption
Taxes: Part 2 Tax Planning International E-commerce vol 3 no 10 at 7; Harley G (1999) "VAT and the Digital
Economy: How Can VAT Evolve to Meet the Challenges of E-commerce" Tax Planning International Ecommerce vol 1 no 10 at 11.
1573
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Baron R (2001) The OECD and Consumption
Taxes: Part 2 Tax Planning International E-commerce vol 3 no 10 at 7; Harley G (1999) "VAT and the Digital
Economy: How Can VAT Evolve to Meet the Challenges of E-commerce" Tax Planning International Ecommerce vol 1 no 10 at 11.
1574
1575
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20Ecommerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Jennings C (2010) The EU VAT System-Time for
a New Approach? International VAT Monitor vol 21 no 4 at 258.
1576
http://bileta.nsdesign7.net/content/files/conference%20papers/2003/Implementing%20E-
326
differentiation between taxable entities under a real-time VAT system, and taxable
entities under the current registration and reverse-charge systems. Lighart points out
that a real-time VAT system will not be viable if financial institutions are not
compensated for their services. 1577 I would not be surprised if the legislator simply
burdens banks with the duty, without compensating them for the additional
administrative burden. The banks, in turn, will undoubtedly, recoup their costs from
their customers by way of increased transaction fees and other bank charges.
It is trite that banks would be reluctant to assume a VAT collection duty voluntarily if
there is no prospect of profit or compensation for their services. That said, the
viability of a real-time VAT collection system is not dependant on the compensation
and voluntary cooperation of financial institutions. Therefore, the absence of a
compensation prospect negatively affects the attractiveness of real-time VAT
collection from the financial institutions perspective.
The cost of VAT collection
under the registration and reverse-charge models is generally recovered from

consumers by increasing profit margins, or the implementation of an administration
or convenience fee. In my opinion the viability or attractiveness of a real-time VAT
collection model lies not in the compensation for collection services as such, but in
the right to recover collection and administrative costs. To avoid a differentiation
between tax collectors under a real-time VAT collection model and the registration
and reverse-charge models, I suggest that financial institutions should be allowed to
charge customers a transaction or convenience fee for facilitating an international
payment and processing, collection, and remittance of taxes due on the transaction.
This would be in line with the current SARS practice of charging a valuation and
transaction fee on imported goods. To avoid exorbitant fees, revenue authorities
should develop a rate structure based on transaction values and frequencies. This
rate structure should be legislated and reviewed annually.
commerce%20Tax%20Policy.pdf [accessed on 4 January 2013]; Jennings C (2010) The EU VAT System-Time for
a New Approach? International VAT Monitor vol 21 no 4 at 259.
1577
327
6.4.4 Debt collection risk

The South African VAT Act 1578 provides that where a VAT vendor has made a supply
on credit on which VAT has been duly collected and remitted, and where the debt
has subsequently become irrecoverable, the vendor may claim an input VAT
deduction of that proportion of the irrecoverable amount which constitutes VAT. 1579
In order to claim an input VAT deduction, three requirements must be met:
i)
the vendor must have made a taxable supply for which payment in money is
deferred to a future date payable either as a once off future payment or in
instalments;
ii) VAT must have been levied on the supply and the vendor must have
furnished a VAT return in respect of the tax period for which output VAT on
the supply was payable, and have properly accounted for VAT on the
supply; 1580
iii) the vendor must have written off the amount of the outstanding debt that has
become irrecoverable. 1581
In the case of VAT collection by financial institutions, where the financial institution
has extended credit (for example, overdraft facilities) to the customer in facilitating
the payment, the financial institution can in principle finance the VAT that it is
required to levy on the value of the supply. Where the credit so extended has
become irrecoverable, the financial institution would not be able to make an input
VAT deduction under section 21 of the VAT Act 1582 for that part of the irrecoverable
debt that constitutes VAT. This is chiefly because the financial institution did not
make a supply in the ordinary course of business for which payment is deferred to a
future date. The granting of credit to facilitate payment, even if the payment
constitutes the payment of taxes, constitutes a financial service which is exempted
1578
Act 89 of 1991.
1580
1581
1582
Act 89 of 1991.
1579
328
from VAT. 1583 The question arises whether the provision in section 21 should be
extended to financial institutions that act as statutory VAT collection agents under a
real-time VAT collection model?
Where a bank extends credit to a customer to enable the customer to pay personal
taxes and the customer fails to repay the bank, the bank can only recover the
amount outstanding from the customer (debtor) or its sureties. It is well established
in common law that the outstanding debt cannot be recovered from the third party to
whom the initial payment was made by the customer. The question is whether this
should be distinguished from the position where the bank has collected taxes on
behalf of the fiscus by extending credit to the customer and the customer has failed
to repay such credit. Where credit is granted to enable the customer to pay personal
taxes, the customer voluntarily wishes to use the loan/credit to settle outstanding
taxes. This is no different from the case where the customer applies the loan to
make payments to any other third party. In the case where credit is granted to
facilitate an international payment of services for which the bank is obliged to collect
VAT on the value of the supply, the customer does not voluntarily apply the funds to
pay taxes. Yet, the customer can, after he has become aware of the fact that the
bank will levy VAT on the transaction, decide to continue or abandon the transaction.
The bank can, as where the customer voluntarily applies for credit to pay personal
taxes, approve or reject the customers application for credit. The bank, therefore,
grants credit entirely at its own risk. In most cases the granting of credit to facilitate
the payment of VAT will be clear from the transaction itself; but not invariably so. The
system must, therefore, provide for an alert function to inform the financial institution
when the overdraft or credit facility is being used to pay VAT on a transaction. The
granting of credit to facilitate VAT payment under a real-time VAT model remains a
financial service which is exempted from VAT. Despite a statutory duty (as proposed
by the RT-VAT model) to collect VAT on the transaction, the financial institutions
may refuse to facilitate the payment of the supply in the case of insufficient funds to
cover both the value of the supply and taxes. The argument that the risk of
irrecoverable debt is shifted from the fiscus to the financial institution under a realtime VAT collection model, therefore, is without basis. A financial institution which
1583
Section 12(a) read with the deeming provision in section 2(1)(f) of the VAT Act 89 of 1991.
329
extends credit to a customer to facilitate VAT payment under a real-time VAT

collection model, should, in principle, not be entitled to recover VAT so collected as
an input VAT credit where the debt has become irrecoverable.
6.4.5 Privacy
Global legislative trends show that the protection of personal data has become a
basic human right which may only be infringed upon under exceptional
circumstances. People generally place a high premium on their personal information
and privacy, and therefore require third parties and professionals who deal with their
personal information do so in confidence. 1584
The right to privacy is furthermore enshrined in the Constitution of the Republic of
South Africa, 1996, which provides that:
Everyone has the right to privacy, which includes the right not to have
a.
their person or home searched;
b.
their property searched;
c.
their possessions seized; or
d.
the privacy of their communications infringed.
1585
6.4.5.1 Banker-customer confidentiality
Banking services originated in temples during the Ancient Period and it were mainly
executed by priests of gods. 1586 This bestowed a holy and mystical character on
banking services. 1587 It has become customary that one of the most important
aspects of being a banker is to keep a customers affairs confidential. 1588
1584
Faul W (1991) Grondslae van die Beskerming van die Bankgeheim LLD Thesis, RAU at 1.
Section 14 of the Constitution of South Africa.
1586
Faul W (1991) Grondslae van die Beskerming van die Bankgeheim LLD Thesis, RAU at 4; Faul W (1986)
Bankgeheimnis: n Regsvergelykende Studie met die Oog op die Hervorming van die Suid-Afrikaanse Reg at 6;
Willis N (1981) Banking in South African Law at 5.
1587
also see the rise of the goldsmiths in Willis N (1981) Banking in South African Law at 8-9.
1588
Faul W (1991) Grondslae van die Beskerming van die Bankgeheim LLD Thesis, RAU at 4; Stevens and Others
v Investec Bank Ltd and Others (2012/32900) [2012] ZAGPJHC 226 (25 October 2012) at para [10].
1585
330
In South Africa, banking secrecy was first recognised in Abrahams v Burns, 1589 and
is traditionally protected by the contractual relationship between the banker and its
customer. 1590 In the case of breach of the banker-customer confidentiality
relationship, the customer can find recourse through delictual or contractual
remedies. 1591 As is the case in the United Kingdom, in South Africa the bankers duty
to maintain secrecy is not a statutory duty but a customary duty that has found its
way in the contract of mandate. 1592 This duty of confidentiality forms part of the tacit
naturalia of the contract between bank and customer. 1593 The customers right to
have his personal affairs kept confidential, is, accordingly, not an absolute right. 1594
Various incidences exist where a bank is required by statute to (under certain
circumstances) furnish third parties with information relating to the transactions or
other personal data of its customers. 1595 In Tournier v National Provincial & Union
Bank of England, 1596 the court ruled that a number of exceptions exist in terms of
which the bankers duty of secrecy cannot be relied upon. In these cases, the banker
is relieved of its duty of secrecy and either has a duty, or is permitted, to disclose
information about the affairs of its customer. 1597 These exceptions can broadly be
classified as:
1589
Abrahams v Burns 1914 CPD 452 at 456.

Van Jaarsveld IL (2001) The End of Bank Secrecy? Some Thoughts on the Financial Intelligence Centre Bill SA
Merc LJ vol 13 no 4 at 587; Schulze WG (2007) Confidentiality and Secrecy in the Bank-client Relationship
Jutas Business Law vol 15 part 3 at 122; Willis N (1981) Banking in South African Law at 24,39-41.
1591
Willis N (1981) Banking in South African Law at 40.
1592
Van Jaarsveld IL (2001) The End of Bank Secrecy? Some Thoughts on the Financial Intelligence Centre Bill SA
Merc LJ vol 13 no 4 at 587.
1593
Schulze WG (2001) Big Sister is Watching You: Banking Confidentiality and Secrecy under Siege SA Merc
LJ vol 13 no 4 at 602; George Consultants and Investments (Pty) Ltd and Others v Datasys Ltd 1988 (3) SA 726
(W) at 736; Densam (Pty) Ltd v Cywilnat (Pty) Ltd 1991 (1) SA 100 (A) at 109.
1594
Abrahams v Burns 1914 CPD 452 at 456; Stevens and Others v Investec Bank Ltd and Others (2012/32900)
[2012] ZAGPJHC 226 (25 October 2012) at para [11]; Van Jaarsveld IL (2001) The End of Bank Secrecy? Some
Thoughts on the Financial Intelligence Centre Bill SA Merc LJ vol 13 no 4 at 587; Willis N (1981) Banking in
South African Law at 40-41.
1595
Stevens and Others v Investec Bank Ltd and Others (2012/32900) [2012] ZAGPJHC 226 (25 October 2012) at
para [11].
1596
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461.
1597
Schulze WG (2001) Big Sister is Watching You: Banking Confidentiality and Secrecy under Siege SA Merc
LJ vol 13 no 4 at 602.
1590
331
i) where the disclosure is required by law;

ii) where disclosure is in the public interest; 1598
iii) where the disclosure is in the interest of the bank; 1599 and
iv) where the disclosure is made with the customers express or implied
consent. 1600
In First Rand Bank Ltd v Chaucer Publications (Pty) Ltd and Others, 1601 it was held
that for considerations of public policy, the relationship between a bank and its
customer must be confidential. 1602 Equally, for considerations of public policy, this
duty is subject to a greater public interest. 1603 Traverso DJP, made the important
ruling that where information, which merely confirms the existence of a customers
bank account at a certain bank, was obtained from a third party and not from the
bank, there is no violation of the bankers duty to secrecy. 1604 The mere publication
of the fact that a person is a customer of a specific bank cannot infringe the right of
privacy of either the bank or the customer, as envisaged in section 14 of the
Constitution. 1605 Schulze, however, points out that the banker-customer relationship,
being an agreement of mandate, necessarily entails that the mandatory may well
have a duty to protect the confidentiality of the affairs of the mandator. 1606 On this
basis, a bank would have legal standing to prevent third parties from publishing the
fact that a certain person banks or deals with a certain bank. 1607
In recent years the legislature has passed various pieces of legislation that would
potentially infringe on the bankers duty of confidentiality towards the customer. This
1598
This would be the case where danger to the state or the public at large supersedes the duty of an agent to
his principle. See Stevens and Others v Investec Bank Ltd and Others (2012/32900) [2012] ZAGPJHC 226 (25
October 2012).
1599
This would be the case where the bank has instituted a legal claim against a defaulting customer and the
disclosure relates to the outstanding debt. See Densam (Pty) Ltd v Cywilnat (Pty) Ltd 1991 (1) SA 100 (A) at
110-111; George Consultants and Investments v Datasys Ltd 1988 (3) SA 726 (W) at 737.
1600
For example, in cases where a customer applies for credit at another institution and authorises the bank to
disclose the information that is required in respect of the credit application.
1601
First Rand Bank Ltd v Chaucer Publications (Pty) Ltd 2008 (2) SA 592 (C).
1602
First Rand Bank Ltd v Chaucer Publications (Pty) Ltd 2008 (2) SA 592 (C) at para [20].
1603
1604
1605
1606
Schulze WG (2007) Confidentiality and Secrecy in the Bank-client Relationship Jutas Business Law vol 15
part 3 at 125.
1607
Schulze WG (2007) Confidentiality and Secrecy in the Bank-client Relationship Jutas Business Law vol 15
part 3 at 125.
332
is especially evident in respect of the collection of taxes. For purposes of this study,
the discussion will be limited to cases where disclosure is required by law for VAT
purposes.
6.4.5.1.1 Statutory duty to disclose information
The Commissioner, or any officer of SARS, may for the purposes of administering
the VAT Act 1608 in relation to any vendor, require such vendor or any other person to
furnish such information, documents, or things as the Commissioner or officer may
require. 1609 Section 57A does not indicate who the any other person is for purposes
of the section, or whether such person must have a business or other relationship
with the taxpayer. Therefore, given its ordinary meaning, a bank would qualify as
any other person for purposes of section 57A. The Commissioner can, as a result,
require a bank to furnish him or her with any information which the bank might hold
in respect of its customer that the Commissioner may find will assist him in
administering the VAT Act. 1610 Section 57A has been repealed and replaced by
section 46(1) of the Tax Administration Act 1611 with effect from 1 October 2012. In
terms of section 46(1), SARS may require any person to furnish it with information
relating to a taxpayer which it may require in respect of the identified or objectively
identifiable taxpayer. 1612
1608
Act 89 of 1991.
Section 57A of the VAT Act 89 of 1991.
1610
Act 89 of 1991.
1611
Act 28 of 2011.
1612
Section 46 further provides that:
(2)A senior SARS official may require relevant material in terms of subsection (1) in respect of
taxpayers in an objectively identifiable class of taxpayers.
(3) A request by SARS for relevant material from a person other than the taxpayer is limited to the
records maintained or that should reasonably be maintained by the person in relation to the taxpayer.
(4) A person receiving from SARS a request for relevant material under this section must submit the
relevant material to SARS at the place and within the time specified in the request.
(5) SARS may extend the period within which the relevant material must be submitted on good cause
shown.
(6) Relevant material required by SARS under this section must be referred to in the request with
reasonable specificity.
(7)A senior SARS official may direct that relevant material be provided under oath or solemn
declaration.
(8) A senior SARS official may request relevant material that a person has available for purposes of
revenue estimation.
1609
333
Croome opines that a citizen who embarks upon a business venture assumes
certain obligations, one of which is to comply with the tax laws of the country. 1613 The
Commissioner has the responsibility of gathering taxes so that the government can
function properly and finance social and welfare programmes. 1614 Should the bank
furnish the Commissioner with information in terms of section 57A of the VAT Act 1615
or section 46 of the Tax Administration Act, 1616 relating to transactions entered into
by its customers, or in respect of any other personal information of the customer, the
bank would not be in breach of its duty of secrecy. 1617 It would merely be in
compliance with national tax laws, the same laws to which the citizen, who started
the business venture, is subject. Governments the world over take defensive steps to
protect their revenue, resulting in the erosion of the tax base. 1618 This is simply
another price we have to pay for living in a complex society.
6.4.5.1.2 Statutory collection agent

Before the promulgation of the Tax Administration Act, 1619 the so-called agency
appointment provision in section 47 of the VAT Act 1620 provided that:
The Commissioner may, if he thinks necessary, declare any person to be the
agent of any other person, and the person so declared an agent shall for the
purposes of this Act be the agent of such other person in respect of the payment
of any amount of tax, additional tax, penalty or interest payable by such other
person under this Act and may be required to make payment of such amount
1613
Croome B (2010) Taxpayers Rights in South Africa at 129.

Croome B (2010) Taxpayers Rights in South Africa at 129.
1615
Act 89 of 1991.
1616
Act 28 of 2011.
1617
Interestingly, Schulze notes that section 74A of the Income Tax Act (now repealed), cannot be applied to
banks to compel them to disclose their customers information upon request of the Commissioner. His
statement is based on the fact that section 74A neither creates an express duty on banks to comply, nor does
it require any objective basis of reasonable suspicion in order for the Commissioner to invoke section 74A. In
essence, section 74A can easily be abused as a fishing expedition into the affairs of the taxpayer. Similar
objections can be raised against section 57A of the VAT Act and section 46 of the Tax Administration Act. It
should, however, be noted that for the Commissioner to require information to compile an estimate
assessment of the taxpayers earnings, no evidence or basis of suspicion is required. See Schulze WG (2001)
Big Sister is Watching You: Banking Confidentiality and Secrecy under Siege SA Merc LJ vol 13 no 4 at 611.
1618
Cockfield AJ (2002) Designing Tax Policy for the Digital Biosphere: How the Internet is Changing Tax Laws
Connecticut Law Review vol 34 no 2 p333.
1619
Act 28 of 2011.
1620
Act 89 of 1991.
1614
334
from any moneys which may be held by him for or due by him to the person
whose agent he has been declared to be: Provided that a person so declared an
agent who, is unable to comply with the requirement of the notice of appointment
as agent, must advise the Commissioner in writing of the reasons for not
complying with that notice within the period specified in the notice. 1621
The collection of taxes by an appointed agent in terms of section 47 can only be

done in respect of taxes, penalties or interest due to SARS that exist at the time of
appointment of the agent. Put simply, the taxpayer and the amounts due must be
known to SARS before an agent can be appointed to collect such amounts. In
addition, the agent must be appointed by way of written notice. A financial institution
cannot be appointed to collect future taxes (on a per transaction basis similar to a
real-time tax collection model) from its customer.
Section 47 has been repealed and replaced by section 179 of the Tax Administration
Act 1622 with effect from 1 October 2012. Section 179(1) provides that:
A senior SARS official may by notice to a person who holds or owes or will hold
or owe any money, including a pension, salary, wage or other remuneration, for
or to a taxpayer, require the person to pay the money to SARS in satisfaction of
the taxpayers tax debt.
In contrast to the notice in terms of section 47 of the VAT Act, 1623 the notice in terms
of section 179(1) of the Tax Administration Act 1624 may be delivered to the collection
agent in electronic format accompanied by a statement reflecting the taxpayers
personal information, taxes due, and the amount required to be paid to SARS. 1625
Where the agent so appointed cannot collect the money in terms of the notice, it
must inform the senior SARS official of its inability (and reasons therefor) to comply
1621
Section 99 of the Income Tax Act 58 of 1962 provides for similar provisions in respect of taxes, interest,
and penalties owed to SARS in terms of the Income Tax Act.
1622
Tax Administration Act 28 of 2011.
1623
Act 89 of 1991.
1624
Act 28 of 2011.
1625
Le Roux D and Van der Walt J (2013) Third Party Appointments by SARS under the Tax Administration Act
Tax Talk issue 38 at 16.
335
with the notice within the period specified in the notice. 1626 The person (agent) who
fails to pay the money in terms of the notice, will be held personally liable. 1627 The
collection of monies in terms of section 179(1) relates only to existing taxes,
penalties, and interest owed to SARS. In contrast to the notice in terms of section 47
of the VAT Act, 1628 the notice in terms of section 179(1) of the Tax Administration
Act 1629 is not limited to the taxpayers funds which the agent holds or to which he has
access at the time of the issuing of the notice, but extends to future funds until the
debt in terms of the notice has been settled.
Under both section 47 of the VAT Act 1630 and section 179 of the Tax Administration
Act, 1631 the appointed agent is prevented from informing the taxpayer of the agents
obligation in terms of the notice to prevent the taxpayer from moving funds. 1632 This
secret withdrawal of funds and subsequent remittance thereof to SARS, would not
be in breach of the banks duty of secrecy, provided that it is carried out in terms of
the financial institutions statutory obligation by way of the written notice. This was
confirmed in Hindry v Nedcor Ltd & Another 1633 where Wunsch J compared the
application of section 99 of the Income Tax Act, 1634 to a garnishee order, and further
ruled that a bank is in the same position as any other of the taxpayers debtors. 1635
Section 99 serves as a civil judgment against the taxpayer, and the bank, as is the
case with any other debtor, is obliged to pay the monies demanded in terms of the
order. 1636 This is a duty that cannot be altered by the banks duty of secrecy towards
its customer. 1637
1626

1628
Act 89 of 1991.
1629
Act 28 of 2011.
1630
Act 89 of 1991.
1631
Act 28 of 2011.
1632
Le Roux D and Van der Walt J (2013) Third Party Appointments by SARS under the Tax Administration Act
Tax Talk issue 38 at 16.
1633
Hindry v Nedcor Ltd and Another 1999 (2) SA 757 (W).
1634
Act 58 of 1962.
1635
Hindry v Nedcor Ltd and Another 1999 (2) SA 757 (W) at 773.
1636
Hindry v Nedcor Ltd and Another 1999 (2) SA 757 (W) at 770; Nedbank Limited v Pestana (142/08) [2008]
ZASCA 140; 2009 (2) SA 189 (SCA) at para [11].
1637
Van Jaarsveld IL (2001) The End of Bank Secrecy? Some Thoughts on the Financial Intelligence Centre Bill
SA Merc LJ vol 13 no 4 at 592; Schulze WG (2007) Electronic Fund Transfers and the Banks Right to Reverse a
Credit Transfer: One Small Step for Banking Law, One Huge Leap for Banks SA Merc LJ vol 19 no 3 at 385.
1627
336
In Nedbank v Pestana, 1638 the court was called upon to decide whether a bank may
legally (or has a duty to) reverse a previous transaction for the transfer of funds from
a customers bank account where a notice in terms of section 99 of the Income Tax
Act 1639 was issued on the bank. In casu, the customer instructed a branch of the
main bank to transfer funds from his account. A few minutes earlier, a notice in terms
of section 99 of the Income Tax Act, 1640 in respect of the customer, had been issued
on bank at its head office. Nedbank contended that the instruction from the customer
to transfer the funds was either given with the intention to defraud SARS or the bank.
On this basis, Nedbank argued, it was legally entitled to reverse the transfer. The
court held that the branch which had been instructed to make the transfer and which
had no knowledge of the notice at the time, may not, and is not legally obliged to,
reverse the previous transaction to fulfil its duties in terms of the section 99
notice. 1641 Consequently, an instruction from a customer to transfer funds may only
be reversed where the mandate to the bank has a decidedly suspicious ring to it, 1642
or where it was given in the furtherance of the commission of a crime. 1643 A mere
speculation on facts is not sufficient. 1644 Schulze, however, opines that this does not
mean that any other competent court may rule that in certain circumstances, a credit
transfer can be reversed, and that a credit transfer is not generally an unconditional
and final juristic act - especially in the case where there was fraud on the part of
either the transferor or the transferee. 1645
1638
Nedbank v Pestana (142/08) [2008] ZASCA 140 (27 November 2008).

Act 58 of 1962.
1640
Act 58 of 1962.
1641
Nedbank v Pestana (142/08) [2008] ZASCA 140 (27 November 2008) at para [15].
1642
Schulze is of the opinion that the available facts from the Pestana case have a decidedly suspicious ring to
them, to whit that Mr Pestana instructed the transfer of the money from his account with the intention of
defrauding SARS or Nedbank. See Schulze WG (2008) Electronic Fund Transfers and the Banks Right to
Reverse a Credit Transfer: One Big Step (backwards) for Banking Law, One Huge Leap (forward) for Potential
Fraud: Pestana v Nedbank (Act one, Scene Two) SA Merc LJ vol 20 no 3 at 296; Schulze WG (2009) A Final
Curtain Call, but Perhaps not the Last Word on the Reversal of Credit Transfers : Nedbank Ltd v Pestana SA
Merc LJ vol 21 no 3 at 400.
1643
1644
1645
Schulze WG (2009) A Final Curtain Call, but Perhaps not the Last Word on the Reversal of Credit Transfers:
Nedbank Ltd v Pestana SA Merc LJ vol 21 no 3 at 401.
1639
337
6.4.5.2 Invasion of privacy by the financial institution
Financial institutions are concerned that a statutory duty to collect taxes on

transactions entered into by their customers may result in an invasion of the
customers right to privacy. According to Ainsworth and Madzharova, it is unlikely
that a real-time VAT collection model would comply with international privacy
laws. 1646 This is in part because the bank would be required to obtain information in
respect of the transaction which the customer could consider private. However, the
financial institution would generally be unaware of the exact particulars of the
underlying transaction. 1647 The bank would only have access to the limited
information to enable it to identify the general type of transaction from the transaction
code or description, the parties to the transaction, and the relevant revenue authority
to which the payments are due. 1648 Consequently, the intricacies of the transaction,
or the relationship between the customer and the supplier, would remain private
information. This is no different from any other transaction for which the financial
institution facilitates payment on behalf of the customer. This can be illustrated by
way of example.
Example 6.2: Where the customer uses a bank card as payment

instrument at a supplier (both conventional or over the Internet), the
supplier and the customers identity, as well as a general description of the
goods purchased or services rendered, would be revealed to the financial
institution to enable it to execute the customers order to make the
payment effectively. The general product or service description is revealed
to the financial institution for record keeping purposes. Without this
information the financial institution would not be able to execute the
customers order to pay.
1646
1647
11 at 19; Ainsworth RT (2011) Technology Can Solve MTIC Fraud-3 and Final International VAT Monitor vol
22 no 4 at 232.
1648
11 at 19.
338
A real-time VAT collection model raises privacy concerns in respect of section 14(d)
of the Constitution in so far as the customers communication with the supplier is
disclosed to the financial institution. Nevertheless, the information transmitted
between the supplier and the financial institution, constitutes the necessary sharing
of information in the ordinary course of businesses to enable the financial institution
to make the payment as it was instructed to do by its customer. The transmission of
information would be in line with what the customer consented to when it instructed
the financial institution to make the payment as in example 6.2 above.
In Bernstein and Others v Bester and Others NNO, 1649 Ackermann J explained the
meaning of privacy as:
...an individual condition in life characterised by seclusion from public and
publicity. This implies an absence of acquaintance with the individual or his
personal affairs and this state. [ ] The unlawfulness of a (factual) infringement of
privacy is adjudged in the light of contemporary boni mores and the general
sense of justice of the community as perceived by the Court. 1650
Ackermann J further explained that:

Privacy is acknowledged in the truly personal realm, but as a person moves into
communal relations and activities such as business and social interaction, the
scope of personal space shrinks accordingly. 1651
Where a person opens a bank account with a financial institution, and subsequently
enters into a business transaction which requires the bank to make certain payments
on his behalf, that persons right to privacy is limited in the interests of business
efficacy. Similarly, where the financial institution transmits information pertaining to
the transaction to SARS in terms of a statutory duty, the customers right to privacy
will not be infringed upon. This is chiefly because the customer, when he entered
into the transaction, subjected himself, through the operation of law (although in
many cases involuntarily), to the countrys tax laws and thus, in effect, consented
through his conduct.
1649
Bernstein and Others v Bester and Others NNO 1996 (2) SA 751 (CC).
Bernstein and Others v Bester and Others NNO 1996 (2) SA 751 (CC) at para [68].
1651
Bernstein and Others v Bester and Others NNO 1996 (2) SA 751 (CC) at para [67].
1650
339
6.4.6 Multiple payment systems
Despite the popularity of credit cards as a payment method, various forms of digital
cash or electronic money are increasingly being used as payment methods. Since
these payment methods are not executed through the financial institution with which
the customer banks, they cannot be tracked and traced by the financial institution
burdened with tax collection. However, at least some of these new methods do
require a formal affiliation or relationship with a bank-for example, credit and debit
transfers (including EFTs), and even electronic money in the form of an electronic
wallet, can be traced to the original possessor of the wallet because these can at
present (at least in South Africa) only be obtained through a bank. Further, one must
have a bank account with a particular bank before it will issue an electronic wallet.
Money-laundering considerations will prevent a bank from issuing electronic wallets
on the payment of a cash sum by the applicant. In some jurisdictions it is possible to
buy an electronic wallet from entities other than banks. This is not, at the time of
writing, possible in South Africa. Thus, at present, all electronic wallets issued in
South Africa are issued through the intervention of banks, which will inevitably
involve the positive identification of the applicant for the card, as well as his address,
details, et cetera. Subsequent payments made by that card can, therefore, be linked
to the original applicant. Electronic wallets are, of course, freely transferable from the
original applicant for the card to subsequent possessors of the card. This increases
the potential for tax avoidance or jurisdiction shopping. 1652 Two possibilities exist to
overcome this issue. The electronic cash system could be linked to the RT-VAT
system allowing it to identify and locate the customer, calculate the applicable VAT,
and deduct it from the customers electronic cash balance. 1653 Alternatively,
electronic cash can be taxed ex ante as is done in the case of single-purpose
vouchers in terms of the EU proposal as discussed in paragraph 4.3.2.2 above. 1654
To avoid double taxation, the tax status of the payment voucher should be revealed
to the supplier. The issuer of the voucher or e-cash would be required to account for
1652
11 at 20.
1653
11 at 20.
1654
Soete L and Ter Weel B (1998) Globalization, Tax Erosion and the Internet at 24
http://arno.unimaas.nl/show.cgi?fid=331 [accessed on 19 February 2013].
340
VAT in the jurisdiction where the customer resides. It should, however, be noted that
the RT-VAT system is designed to cope with multi-purpose vouchers and e-cash,
and it is likely to be more effective than the current (EU) system. 1655
Bentley suggests a third option. The electronic cash system could act as a mere
notification tool that informs the customers financial institution of the date, value, and
type of transaction. 1656 This would enable the financial institution to collect the
applicable taxes from the customers account ex post facto. 1657 This would not be
possible where the electronic wallet (to mention but one example) has been
transferred from one person to another. The model further requires closer
cooperation between the e-cash provider and the financial institution. The fraud
potential, privacy issues, and cooperation requirements render this model infeasible.
In addition, the financial institution could effectively be required to extend credit to
the customer in the case of insufficient funds to collect and remit VAT.
Some form of electronic payment or payment method that leaves a transaction
record is required for the RT-VAT system to be effective. Cash transactions would
not be detected and taxed by the RT-VAT system. 1658 Escaping the VAT net by
means of cash payments and the failure to keep records of the transaction is not
restricted to e-commerce transactions. 1659 The parties can also enter into a barter
1655
Jennings C (2010) The EU VAT System-Time for a New Approach? International VAT Monitor vol 21 no 4
at 258.
1656
11 at 20.
1657
11 at 20.
1658
11 at 25; Ainsworth RT and Madzharova B (2012) Real-Time Collection of Value Added Tax: Some Business
and Legal Implications Boston Univ School of Law Working Paper no 12-51 at 22
(2011) The Future of the European VAT System International VAT Monitor vol 22 no 6 at 394; Jennings C
(2010) The EU VAT System-Time for a New Approach? International VAT Monitor vol 21 no 4 at 258;
1659
Williams C (2011) Technology Can Solve MTIC Fraud-2 International VAT Monitor vol 22 no 4 at 231;
Ainsworth RT (2011) Technology Can Solve MTIC Fraud-3 and Final International VAT Monitor vol 22 no 4 at
232.
341
agreement to escape the application of the RT-VAT system. 1660 However, barter
transactions and cash payments are rare in cross-border e-commerce. 1661
In South Africa, the use of credit cards and electronic fund transfers (EFTs) 1662 is
increasingly popular as payment methods to replace traditional cheque and cash
payments. 1663 Yet, the volume of credit card payments is relatively small compared
to that of EFT transactions. 1664 This could probably be attributed to strict credit
extension regulations and a general perception that credit card transactions are
unsafe and expensive.
6.4.7 Greater international cooperation required
The implementation of an international classification code system as discussed in

paragraph 6.1.4.2 above, requires significant international consensus. In addition,
international standards and licensing of financial institutions burdened with collecting
VAT under a RT-VAT system must be established. Uniform software - such as the
existing RT-VAT system - must be applied by all participating revenue authorities,
financial institutions, and suppliers to ensure smooth and continuous operation.
Bentley opines that it would only require a few large and influential countries to adopt
an RT-VAT system that would set the standards and requirements for developing
countries to follow. 1665 That said, jurisdictions that fail to apply the uniform
international standard would not be excluded from the market. The inefficiencies of
traditional tax collection mechanisms and an increasing loss in revenue, could
convince the majority of tax authorities to adopt a uniform standard under a RT-VAT
system.
1660
11 at 25.
1661
1662
The term includes the payment by electronic bank card, electronic transfers settled among banks but
excludes credit card transactions and intrabank transactions.
1663
South African Reserve Bank (2012) Quarterly Bulletin Sept no 265 at S-13.
1664
South African Reserve Bank (2012) Quarterly Bulletin Sept no 265 at S-13.
1665
11 at 24.
342
In some cases, additional bilateral or multilateral agreements between jurisdictions

will have to be negotiated to avoid double taxation or unintended under taxation. 1666
This would be the case where one jurisdiction applies the origin base taxation model,
and the other jurisdiction applies the destination base taxation model. In most cases,
these bilateral and multilateral agreements already exist between major trading
jurisdictions in respect of tangible goods. The application of the agreements can
merely be extended to include intangible goods. In practice, almost all the
jurisdictions apply the destination principle for cross-border transactions. 1667
Unlike other tax collection models that require a regional or international clearing
house, or confer extra-territorial powers on tax authorities, the RT-VAT system
allows each jurisdiction to recover VAT within its borders and in accordance with
domestic VAT rules. 1668 Save for standardised international classification codes and
licensing standards, the operation of the RT-VAT system requires minimal
cooperation between revenue authorities in different jurisdictions.
6.5 Conclusion
International trends show that tax collection by third party intermediaries is

increasingly being introduced in countries where cross-border trade and employment
are on the rise. 1669 This is particularly evident in Latin American countries which
increasingly apply withholding tax mechanisms as a VAT collection tool. 1670 The
implementation of withholding tax mechanisms in terms of which a third party
(financial institution) is burdened with the withholding duty, is a common modern
taxing trend among developing countries. Similar trends have recently been
1666
11 at 23.
1667
1668
11 at 25.
1669
1670
343
introduced in South Africa. 1671 However, collection by third party intermediaries will
inevitably result in costs to banks. Banks will pass these on to their customers. In a
country such as South Africa where there is a high percentage of unbanked
citizens, and where bank costs are already amongst the highest in the world, the
affordability of burdening low income bank customers with even higher bank costs,
must be questioned.
VAT collection under an RT-VAT system complies with the OECDs principles of
neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and
flexibility. It affects only existing collection and reporting rules that already apply to all
forms of commerce. 1672
The development of technology and software by RTpay, eliminates most of the
objections that were raised against VAT collection by financial institutions. The issue
of privacy, and the bankers duty of secrecy remain the chief objections to an RTVAT system. This obstacle can be overcome by the development and
implementation of a statutory duty on financial institutions to collect VAT on behalf of
SARS through a withholding tax mechanism implemented by an RT-VAT system.
However, since RTpay remain to be tested, the successful integration of the
software with that of financial instutions and revenue authorities is speculative.
Cross-border digital trade is a fully fledged electronic trading, and often automated,
phenomenon. The execution of these transactions requires no or minimal human
intervention. It therefore follows that the taxation of cross-border digital transactions
should preferably be done electronically and with minimal human intervention. A
withholding tax mechanism by financial institutions through the implementation of an
RT-VAT system, offers this possibility. The implementation of the RT-VAT system
should be considered as a matter of urgency in cases where the registration and
reverse-charge mechanisms are found to be ineffective tax collection models. 1673
1671
In terms of section 37I of the Income Tax Act 58 of 1962 any person who pays interest to or for the benefit
of a foreign person must withhold the tax from that payment except in circumstances where the interest or
the foreign person is exempted from tax. Section 37I will come into operation on 1 July 2013. Similarly, in
terms of section 49E, any person making payment of any royalty to or for the benefit of a foreign person must
withhold 15% tax from that payment. Section 49E will come into operation on 1 July 2013.
1672
11 at 25.
1673
See further para 7.8.4.
344
CHAPTER 7:
RECOMMENDATIONS AND CONCLUSION
7.1 Introduction
Technological advances, the availability of Internet networks, and the rise in

consumer confidence in technologically advanced communication and entertainment
tools, have contributed to a rise in e-commerce transactions in South Africa. These
transactions are not confined to the borders of South Africa. Consumers are
increasingly
engaging
in
cross-border
e-commerce
transactions.
Moreover,
automated machine-initiated cross-border digital downloads are becoming a

common phenomenon as advanced technological equipment such as smart phones,
on-board computers in vehicles, tablets, and other devices demand regular software
updates.
VAT systems around the world date from a period when e-commerce - in particular
cross-border digital trade - was the future brainchild of computer technicians and
futuristic dreamers. Throughout this study it has been shown that VAT systems, as
originally designed, can, in the main, not cope with the effective taxation of crossborder digital transactions. The South African VAT Act 1674 is riddled with uncertainty
which hinders the effective taxation of cross-border digital trade.
In identifying the problems associated with the taxation of cross-border digital trade,
the discussion in this study has centred around the following issues:
1674
Act 89 of 1991.
345
Throughout the study it has emerged clearly that the South African VAT Act1675
requires amendments that are in line with international trends if it is effectively to tax
cross-border digital trade and further avoid the erosion of the tax base. However, it
requires more than mere legislative redrafting to achieve a durable solution.
Recources will have to be devoted to reform tax policies, and tax administrators must
be equipped with the tools (such as increased powers, and information technology)
to execute their duties.
In this chapter I present my recommendations on the basis of the questions above.
This will be achieved by extrapolating a brief summary of my findings and the
shortcomings in the VAT Act 1676 identified as requiring amendment. This is followed
by my recommendations based on developments in EU VAT laws and the OECD
guidelines on consumption taxes.
7.2 Is there a supply of goods or services?

The VAT Act 1677 contains no definition of electronically supplied goods. As a result
uncertainties have arisen as to whether digital supplies should be treated as the
supply of goods or of services. Despite indications that SARS is likely to treat
electronically supplied goods as services, no official policy has been forthcoming. In
line with the OECD guidelines and the amendments envisaged by Council Directive
2008/8/EC of the harmonised EU VAT laws, digital products should generally be
treated as a supply of services. However, a blanket classification of electronically
supplied goods as services cannot be recommended where differing VAT rates
apply.
In a modern commercial environment, which is characterised by constant
technological changes and advances, many technology-driven supplies could
1675
Act 89 of 1991.
Act 89 of 1991.
1677
Act 89 of 1991.
1676
346
escape the VAT net as they do not fall within the definition of either goods or
services. A definition of electronically supplied goods is, therefore, essential in any
VAT system.
As technology is constantly advancing and evolving, restrictive or technology-specific
definitions could be outdated before they are promulgated. This was identified as the
Achilles heel in the definition of electronically supplied services under the
harmonised EU VAT rules. The ECJs history of strict interpretation of legislation
means that many modern electronically supplied services fall outside the scope of
the EU definition, and ultimately escape the VAT net.
To remedy so restrictive an application, a general definition of electronically supplied
services is required to serve as a catchall for most digital supplies. In addition, an
annual list of the types of supply that qualify as electronically supplied services
must be issued to circumvent avoidance. This list must be incorporated into the VAT
Act 1678 as an annexure, and must be updated in collaboration with technology
experts to ensure its relevance. It is important that this list not be published in the
form of regulations or Interpretation Notes, as these are of persuasive value only.
I therefore recommend the following amendments to the VAT Act: 1679
The term electronically supplied services must be included after the word
services in section 7(1)(a), The provision will then read:
Subject to the exemptions, exceptions, deductions and adjustments
provided for in this Act, there shall be levied and paid for the benefit of
the National Revenue Fund a tax, to be known as the value-added tax:
(a) on the supply by any vendor of goods or services, or
electronically supplied services supplied by him on or after the
commencement date, in the course or furtherance of any
enterprise carried on by him.
In addition, provision must be made for imported electronically supplied

services by the insertion of section 7(1)(d) that reads:
1678
1679
Act 89 of 1991.
Act 89 of 1991.
347
on the
import of any electronically supplied services by any
person on or after the commencement date.
A definition of electronically supplied services must be incorporated in

section 1 which will read as follows:
electronically
supplied
services
means
anything
with
commercial value that is capable of being delivered over the

Internet or any other electronic network, the nature of which
requires no or minimum human intervention to render the supply
thereof.
As a result of the technology-bound nature of an indicative list of what constitutes
electronically supplied services, I do not attempt to compile a list in this thesis.
7.3 Where is the supply made?

The main reason for the ineffectiveness of the VAT Act 1680 to adequately tax crossborder digital trade, lies in the absence of definitive place-of-supply rules. The
reliance on the utilised and consumed in the Republic principle adds to confusion in
determining the place of supply or consumption. This is particularly evident where
intangible products or services have been physically delivered (downloaded) outside
of the Republic, but where the benefit of the service or product is experienced in the
Republic. Unless the electronically supplied product emits signals which enable the
supplier or revenue authority to locate the actual place of consumption, or if the
place of consumption can be determined by an after sales relationship between the
supplier and the customer, the actual place where the products are utilised and
consumed cannot be located.
Article 59a of Council Directive 2008/8/EC - which will come into operation on 1
January 2015 - provides that the use and enjoyment principle may be applied in
cases where the special place-of-supply rules (applicable to electronically supplied
services) lead to double or non-taxation, or market distortions. In other words, the
1680
Act 89 of 1991.
348
use and enjoyment principle should only be applied in exceptional circumstances.

This is in line with the OECD guidelines.
To avoid the difficulty of determining the place of consumption under the use-andenjoyment principle, the OECD recommends that proxies, or deemed place-ofsupply rules, should be implemented. The OECD recommends the following proxies:
In the case of B2C transactions where the customer and supplier are situated
in different jurisdictions, the place of supply is the jurisdiction where the
customer resides.
In the case of B2B transactions where the supplier and customer business are
situated in different jurisdictions, the place of supply is the jurisdiction where
the customers business is established.
Until 31 December 2014, EU intra-community B2C transactions will be taxed in the

member state of supply (origin), while supplies from non-EU suppliers will be taxed
in the member state where the customer resides (in the case of B2C transactions),
or where the customers business is established (in the case of B2B transactions).
These differentiating place-of-supply rules put EU suppliers at an economic
advantage over non-EU suppliers. This could lead to market distortions. The
amendments that will take effect from 1 January 2015, are in line with the OECD
proposals which provide that in the case of cross-border electronically supplied
services, the place of supply is the place where the customer resides (in the case of
B2C transactions), or where the customers business is established (in the case of
B2B transactions).
It has been established that the use-and-enjoyment principle cannot stand, and that
the VAT Act 1681 must be amended to include definitive place-of-supply rules. This
can be achieved by the insertion of section 7A:
Place of supply rules
(1) The place of supply of electronically supplied services to a person or entity
other than a registered vendor shall, for purposes of this Act, be the place
where such person or entity usually resides or has his fixed address, where:
1681
Act 89 of 1991.
349
(a) such place of residence or fixed address shall be determined in terms of

paragraph (a) of the meaning of resident in terms of section 1 of the
Income Tax Act (Act 58 of 1962).
(2) The place of supply of electronically supplied services to a registered vendor
or other taxable entity, shall be the place where such vendor or taxable entity
is established, has his fixed address, or usually resides where:
(a) such place of establishment, fixed address, or usual residence, shall be
determined in terms of paragraph (b) of the meaning of resident under
section 1 of the Income Tax Act (Act 58 of 1962).
It has further been established that even where definitive place-of-supply rules exist,
the identification and location of customers cannot be accurately established.
Various identification and location tools exist, none of which can guarantee 100 per
cent accurate results. Generally, suppliers burdened with the duty to collect VAT on
cross-border transactions, would be subject to penalties where VAT was incorrectly
levied as a result of inaccurate customer identification and location. Guidelines
should be developed to indicate the extent to which suppliers are required to apply
identification and location tools. In addition, provision should be made for exemption
from penalties where it can be established that a supplier has complied with the
guidelines. See further recommendations in this regard in paragraph 7.8.4 below.
Determining a customers VAT or tax status is difficult where VAT or tax registration
numbers cannot be verified. Electronic verification databases such as the EU VIES
system offer little assistance to e-commerce suppliers who are reliant on fast,
automated electronic transaction tools. Guidelines should be developed to indicate
the extent to which suppliers must verify the authenticity of the customers
declaration of its tax status. See further recommendations in this regard in paragraph
7.8.3 below.
In order to circumvent high VAT rates, business customers often route digital
supplies to branches of the main business which are established in low VAT
regimes. These supplies are then re-routed to the main business as an intra-group
supply. Suppliers of electronically supplied services should not be burdened with any
subsequent supplies which the customer might make. Any such supply to an
350
independent branch established in the Republic, must be treated as an imported

supply in terms of section 14(4) of the VAT Act. 1682
7.4 When is the supply made?
VAT is generally levied on the date of issue of an invoice or on payment, whichever

is earlier. In the case of customer initiated transactions, the existing time-of-supply
rules under the VAT Act 1683 can be applied to determine the time of supply.
However, in the case of automated transactions, such as software updates,
determining the time of supply is complicated by the lack of invoices and/or definitive
payment records. While these transactions generally stem from prior or existing
agreements, the actual time of supply cannot be determined by the customer unless
he is informed of the payment by the financial institution effecting the payment, or if
an invoice is issued. Customers that are required to account for VAT on imported
services under the reverse-charge mechanism in terms of section 14(1), could
potentially be faced with additional penalties and interest for late compliance.
Where automated transactions are governed by prepaid agreements, two conflicting
interpretations exist:
a) The time of supply is determined by the date of payment of future services
irrespective of the date on which actual services begins.
b) Payment in a prepaid agreement constitutes a conditional payment rendering
the agreement a conditional agreement. Neither the agreement, nor payment
constitutes an invoice or payment for purposes of determining the time of
supply in terms of section 9(1). The time of supply can be determined when
the condition has been fulfilled and the supplier becomes entitled to the
payment.
These conflicting interpretations can be remedied by the introduction of deemed
time-of-supply rules in section 9(2) which reads as follows:
A supply of goods or services [or electronically supplied services] shall be
deemed to take place:
1682
1683
Act 89 of 1991.
Act 89 of 1991.
351
(f)
where the supply is for consideration in money received by the supplier

as an advance payment for the supply of goods, services, or
electronically supplied services at a future date under a prepaid
agreement, at the time when such payment is made in respect of the
prepaid agreement.
In terms of this proposed amendment, where the customer terminates the agreement
before the expiry date, the balance of the prepaid amounts and VAT must be
returned to the customer upon cancellation. The supplier would be entitled to an
input VAT deduction on the payment returned and VAT. Where the reverse-charge
mechanism in terms of section 14(1) applies, the taxpayer should, in principle, be
entitled to claim a VAT refund directly from SARS.
Determining the time of supply is further complicated by the increased use of
vouchers and the multiple uses to which vouchers can be put. The VAT Act 1684 does
not provide adequate rules to determine the time of supply where multi-purpose
vouchers are used in exchange for a variety of goods and services. Similar lacunae
exist in the EUs harmonised VAT rules. However, the European Commission has
put forward draft proposals in respect of the treatment of vouchers. In the absence of
OECD guidelines, I recommend that the EU draft proposals should be adopted to
amend the VAT Act 1685 to provide for the treatment of vouchers. The following
amendments should be considered:
Definitions of single-purpose vouchers and multi-purpose vouchers should be

included in section 1 that read single-purpose voucher means a voucher that carries the right to
receive the supply of goods or services where the suppliers identity,
place of supply, and the VAT rate applicable to the supply of goods or
services is known at the time of issue of the voucher.
multi-purpose voucher means
any voucher, other than a
discount or rebate voucher, which does not constitute a single-purpose

voucher.
1684
1685
Act 89 of 1991.
Act 89 of 1991.
352
In order to determine the time of supply in the case of single- and multipurpose vouchers, deemed time-of-supply rules should be included in section
9(2) which read as follows:
(g)
where a single-purpose voucher is issued against the payment
of consideration, at the time when the voucher is issued and paid for.
(h)
where a multi-purpose voucher is issued, at the time when the
voucher is partially or fully redeemed.
7.4 What is the value of the supply?
VAT is levied on the consideration paid for the supplies, or on the open market value
of the supplies where consideration other than money was used, or in the case of
supplies between connected persons.
In determining the value of supplies, the VAT Act 1686 differentiates between imported
goods and imported services by imposing a higher value on imported goods. In
addition, the taxation of imported goods is subject to a valuation and customs
transaction charge. This differentiation could result in market distortions where the
digital version of the tangible goods can be imported at a lower cost. Tangible goods
and their intangible equivalent should be taxed at the same value.
Unlike the EU VAT rules, the VAT Act 1687 provides for value-of-supply rules when a
single-purpose voucher is issued against the payment of consideration. VAT is levied
on the value of the consideration paid for the voucher. The value of the goods and
services supplied upon redemption of the voucher, is nil. The European
Commissions draft amendment proposals on the determination of the value of
supplies in the case of single-purpose vouchers, provide for similar deemed value-ofsupply rules.
In the case of multi-purpose vouchers, the VAT Act 1688 provides that the value of the
goods so redeemed must be accepted as the value for VAT purposes. In terms of
1686
Act 89 of 1991.
Act 89 of 1991.
1688
Act 89 of 1991.
1687
353
the European Commissions draft amendment proposals, the deemed value in the
case of multi-purpose vouchers should be the nominal value at the time when the
voucher was issued.
Since the value of the goods or services supplied cannot
always be determined with certainty, especially in the case of automated

transactions, I suggest that the EU proposal of a nominal value should be adopted.
Where no consideration is paid in terms of a bona fide loyalty or similar reward
scheme, the value of the supplies should be nil. In the case of illegal file sharing, the
open market value of the supplies should apply. However, it should be cautioned that
VAT should not be applied as a substitute to penalise criminal action where national
legislation fails to penalise or fails to prohibit illegal behaviour.
7.5 Was the supply made by a taxable entity?

The provisions in the VAT Act 1689 governing the determination of the taxable entity
are unproblematic. However, it remains uncertain whether a foreign supplier who
makes digital supplies in excess of the R1 million threshold, is required to register as
a VAT vendor and levy and collect VAT on its supplies. The strict statutory
registration requirements and the additional strict registration process, prevent
foreign suppliers from registering as South African VAT vendors, despite the fact that
they are required to register based on the threshold requirements in section 23(1).
This is not in line with the OECD proposal to allow for a slim-line registration
mechanism for foreign non-established suppliers of services, where such suppliers
are, in principle, required to register as the identified taxable entity. When and how
the proposed vendor registration model for foreign suppliers who supply e-books,
music, and other digital goods will be implemented, is uncertain.
Issues concerning the identification of the taxable entity are further discussed in the
proposed VAT collection mechanisms in paragraph 7.8 below.
1689
Act 89 of 1991.
354
7.6 Is the supply made in the course and furtherance of an enterprise?
In terms of the OECD proposals, businesses should not carry the burden of VAT
where they are required to collect VAT on behalf of revenue authorities either under
a registration model, or under a reverse-charge mechanism.
The VAT Act 1690 provides that vendors can, subject to exceptions and exclusions,
claim an input VAT deduction on supplies acquired in the course and furtherance of
their enterprise. In the case of imported services in terms of the use-andconsumption principle, the recipient vendor of imported services has to account only
for VAT on the imported services that are not applied by it in the course and
furtherance of an enterprise. The use-and-consumption principle relies on the
vendors bona fide interpretation of what constitutes in the course and furtherance of
an enterprise. Non-disclosure of imported services that are not applied in the course
and furtherance of an enterprise, cannot be detected and ultimately escape the VAT
net.
To eliminate VAT fraud, the European Commission proposed that in the case of
cross-border trade, the reverse-charge mechanism as currently applied in the
Netherlands, should find general application. Under this system, the recipient vendor
of imported services must account for VAT on the supplies, irrespective of whether
or not the supplies are applied in the furtherance of the enterprise. The supplier will
immediately be entitled to an input VAT deduction. Despite the additional
administrative burden, VAT fraud and unintended mistakes can easily be detected.
I therefore recommend that the reverse-charge mechanism as applied in the
Netherlands should be implemented in the case of B2B cross-border trade. This can
be achieved by amending the VAT 201 form to make provision for:
a) The disclosure of the value of imported services, irrespective of their
application in the course and furtherance of an enterprise.
b) An input VAT deduction in respect of imported services that were applied in

the course and furtherance of an enterprise.
1690
Act 89 of 1991.
355
7.7 Is the supply taxable?

The provisions in the VAT Act 1691 that provide for standard rated, zero-rated, and
exempt supplies are fairly clear and simple to apply, and no amendments are
required.
Where provision is made for specific types of supply such as electronically supplied
services, legislators should caution against conflicts arising between the list of
taxable electronically supplied services, and the lists of zero-rated or exempt
services. As a result of conflicts under the harmonised EU VAT rules, confusion
exists as to whether a supply is taxable or exempt.
To avoid market distortions, legislators should further avoid differentiated VAT rates
between tangible and the intangible versions of products.
7.8 How is VAT on the transaction collected?
Inadequate and inappropriate VAT collection mechanisms in cross-border trade are

the main contributors to VAT fraud and the erosion of the tax base. Tax collection
models should ideally ensure the most efficient tax collection through the elimination
of: i) tax evasion and avoidance; and ii) unintended over and under-taxation, without
over burdening the taxable entity.
This must be achieved at the lowest
administrative cost to the revenue authority.
7.8.1 Reverse-charge mechanism
The reverse-charge mechanism is an ineffective tax collection model in so far as it

relies on the taxpayers honesty and integrity. In the Netherlands, the reverse-charge
mechanism has been relatively successfully applied in the case of B2B transactions
where suppliers are required to disclose every cross-border transaction. As a result
of the use-and-consumption principle applied in South Africa, many transactions
escape the VAT net because of non-compliance or under-reporting. The anonymity
of e-commerce and the absence of physical evidence of supplies can further assist
taxpayers to abuse the self-assessment procedure. I accordingly recommend that
1691
Act 89 of 1991.
356
the reverse-charge mechanism (as it is currently applied in South Africa) should not
be applied in the case of imported electronically supplied services.
7.8.2 Registration
As an interim solution, the OECD proposes registration for B2C transactions, and a
general reverse-charge mechanism for B2B transaction. The registration of foreign
suppliers mainly benefits the revenue authorities. The additional compliance and
administrative burden on suppliers is costly and it often outweighs the benefit of
establishing in foreign markets. Moreover, it could result in one supplier registering in
more than a 1000 jurisdictions worldwide. 1692 To limit the number of registrations,
provision should be made for one-stop-shop registrations in major trading regions.
This would require significant global cooperation between nations.
In the EU, where a simplified registration procedure and a one-stop-shop have been
implemented, compliance cannot be guaranteed. It remains uncertain whether EU
Member States will have extra-territorial powers to enforce compliance on non-EU
suppliers.
Under the current registration requirements in terms of the VAT Act, 1693 foreign
suppliers must, among other strict requirements, have a fixed establishment in the
Republic. This is in contrast to the slim-line registration model proposed by the
OECD. Developing a slim-line registration process for foreign suppliers of
electronically supplied goods requires extensive amendments to the VAT Act 1694 and
the current registration procedure. This would jeopardise the measures taken by
SARS to eliminate false VAT registrations and VAT fraud. In addition, it would create
an adverse differentiation between vendors established in the Republic and foreign
vendors which is not in line with the principle of tax neutrality.
Furthermore, enforcement measures and penalties for non-compliance granting
SARS extra-territorial powers, would have to be developed. These powers will not be
enforceable unless tax treaties are in place between South Africa and the country in
1692
Registration is sometimes not only required at a national level, but also at a state and/or local level.
Act 89 of 1991.
1694
Act 89 of 1991.
1693
357
which the enforcement measures are to be imposed. Additional bilateral and

multilateral treaties would, therefore, have to be negotiated.
If the current foreign supplier registration data are indicative of supplier compliance
trends, the cost of establishing and enforcing a workable registration mechanism for
South Africa would outweigh the annual revenue. In this light, I recommend that
registration should be considered as a last resort.
7.8.3 OECD proposals
Alternative collection mechanisms proposed by the OECD include: i) collection at

source and remittance to the revenue authority in the jurisdiction of consumption; ii)
Bit-rate taxation; and iii) VAT collection by financial institutions.
Collection at source and remittance would require global cooperation between
revenue authorities. The OECD recommends that this can be achieved through the
negotiation of treaties between major trading jurisdictions. It should, however, be
noted that suppliers often trade in jurisdictions other than those with which bilateral
agreements have been concluded. It is further unlikely that revenue authorities would
fund the cost of establishing and maintaining an international online tax collection
body. It is likely that suppliers would be required to fund this model. This would
exclude many small to medium size enterprises from the market. Furthermore, this
model does not remove the suppliers duty to locate and identify the customer.
Bit-rate taxation has no regard for economic value since tax is levied on the amount
of data flow. This means that worthless data, such as e-mail correspondence, would
effectively be taxed. Since the OECD does not recommend the introduction of new
taxes in e-commerce, Bit-rate tax should be rejected.
7.8.4 Collection by financial institutions
The OECDs rejection of VAT collection by financial institutions is based on

resistance and objections by financial institutions, and the general international
perception of the banker-customer relationship in respect of customer privacy at the
time when the proposal was considered. Globally, revenue authorities increasingly
358
introduce legislation imposing the collection of taxes by financial institutions or

intermediaries in the cases where cross-border trade and employment are on the
rise.
The development of the RTpay system eliminates the main concerns in respect of
product classification and taxation, software requirements, and integration with
revenue systems. Where the destination principle applies, global cooperation is
generally not required. Suppliers are not required to identify and locate customers,
further removing the need for guidelines as proposed in paragraph 7.3 above. Since
both B2B and B2C transactions are taxed, the need to establish the customers tax
status is eliminated. Business customers can claim an input VAT deduction.
The main objections to VAT collection by financial institutions are the possible
infringement of the customers right to privacy, and the possible breach of the
bankers duty of confidentiality. Neither the customers right to privacy, nor the right
to banker-customer confidentiality is absolute and can be limited by statute.
Moreover, when entering into business ventures/transactions, one voluntarily subject
oneself to laws and regulations that could infringe ones rights. The infringement of
the customers right to privacy is a necessary concomitant of effective trade.
The proposed benefits of VAT collection by financial institution through the RTpay
system outweigh the cost of implementation and the administrative burden placed on
financial institutions. As the RTpay system was developed to integrate with existing
international banking software systems, it can be applied in South Africa without
extensive adjustments to the existing South African banking system. Moreover,
integration with existing software applications used by SARS could result in a fully
automated VAT system for all imports (goods, services, and electronically supplied
services). However, the RTpay system remains to be tested.
To impose the burden of VAT collection on financial institutions, the following
amendment to section 7(2) is required:
Except as otherwise provided in this Act, the tax payable in terms of
paragraph (a) of subsection (1) shall be paid by the vendor referred to in that
paragraph, the tax payable in terms of paragraph (b) of that subsection shall
be paid by the person referred to in that paragraph[,] and the tax payable in
359
terms of paragraph (c) of that subsection shall be paid by the recipient of the
imported services [and the tax payable in terms of paragraph (d) of that
subsection shall be paid by the financial institution which is authorised or
instructed to make payment on the transaction.]
7.9 Conclusion
Whatever the solution adopted, the taxation of e-commerce should not artificially
advantage or disadvantage e-commerce over comparable traditional commerce, or
unnecessarily hinder the development of e-commerce. 1695 Finding a global solution
requires global cooperation on a massive scale. It is impossible for such a solution to
satisfy both suppliers and revenue authorities around the world. Some measure of
autonomy should be allowed to countries to develop their own or regional policies to
the extent that these do not adversely affect the rights of other jurisdictions, or put a
damper on business efficacy and development. The highly criticised EU model
potentially infringes on the international rights of traders in the USA, and could
severely impact on the development of e-commerce between these two major
trading partners. Should countries like South Africa follow suit, e-commerce and
international trade could forever be relegated to the history books.
The RT-VAT payment system discussed in Chapter 6 allows for greater autonomy
amongst jurisdictions to develop VAT rules with international reach which can be
implemented at local level without infringing on the rights of foreign jurisdictions.
Cross-border digital trade is a fully fledged electronic trading and often automated
phenomenon. The execution of these transactions requires little or no human
intervention. It is, therefore, imperative that VAT collection should be effected by an
electronic automated system that requires minimal human intervention.
I believe that my proposals to amend the VAT Act 1696 will not only remove the current
inadequacies in levying VAT on digital imports, but that they would, in conjunction
1695
OECD (1998) Dismantling the Barriers to Global Electronic Commerce at 39

http://www.oecd.org/sti/2751237.pdf [accessed on 1 February 2013].
1696
Act 89 of 1991.
360
with the implementation of an RTpay system, lead to a VAT policy that provides for
the levying and collection of VAT on all cross-border transactions.
361
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THE COLLECTION OF VALUE ADDED TAX ON ONLINE CROSSBORDER TRADE IN DIGITAL GOODS

Stephanus Phillipus van Zyl

submitted in accordance with the requirements

UNIVERSITY OF SOUTH AFRICA

Technological advances have had a major impact on traditional retail shopping

anonymising technology; B2B transactions; B2C transactions; banker-customer

Purpose of the study......................................................................................... 3

Research question(s) ....................................................................................... 5

Organisation of the study.................................................................................. 6

CHAPTER 2 THE RISE OF E-COMMERCE ............................................................ 15

2.4.3 E-commerce in South Africa ........................................................................ 33

2.6 Impact of cross-border digital trade on VAT collection ....................................... 44

3.4.2 Where is the supply made? ......................................................................... 68

3.4.3 When is the supply made? .......................................................................... 86

3.4.4 What is the value of the supply? .................................................................. 91

3.4.5 Was the supply made by a taxable entity? .................................................. 99

3.4.5.3 The non-resident non-vendor importer as taxable entity .............................................. 109

3.4.6 In the course or furtherance of an enterprise ............................................. 110

3.5 Conclusion ....................................................................................................... 126

4.3.3 When is the supply made? ........................................................................ 173

4.3.4 What is the value of the supply .................................................................. 181

4.3.5 Is the supply made by a taxable entity? ..................................................... 190

4.3.5.3 B2C transactions between an EU vendor and EU non-vendor ....................................... 192

4.4 Conclusion ....................................................................................................... 228

5.3.1.17 Electronic access to professional advice ....................................................................... 245

5.3.2 Where is the supply made? ....................................................................... 254

5.3.3 When is the supply made? ........................................................................ 273

5.4 Conclusion ....................................................................................................... 300

6.4.2 Sophisticated software / change in systems required ................................ 324

6.4.6 Multiple payment systems ......................................................................... 340

7.3 Where is the supply made? .............................................................................. 348

Advanced Research Projects Agency

European Laboratory of Particle Physics

Committee on Fiscal Affairs

Centre for Tax Policy and Administration

Central Processing Unit

European Court of Justice

European Economic Community

Electronic Funds Transfer

General Agreement on Tariffs and Trade

Gross Domestic Product

National Science Foundation

Organisation for Economic Cooperation and Development

Organisation for European Economic Cooperation

Random Access Memory

South African Customs Union

South African Revenue Service

Supreme Court of Appeal

Transmission Control Protocol

World Trade Organisation

Technical Advisory Group

Uniform Resource Locator

United States of America

Union of Soviet Socialist Republics

Value Added Tax

Extensible Markup Language

Ever since the early commercial exploitation of inter-connected digital computers in

Purpose of the study

Slevin J (2000) The Internet and Society at 3.

The importance of the study is emphasised by the interpretation of statistical data on

drawn from legislation, text books, professional subject journals, publications by

Organisation of the study

The study is divided into seven chapters arranged as follows:

Chapter 1: Introduction, research question(s), methodology and organisation